David

Karki

Read David's bio and previous columns here

September 22, 2008

Wall Street: The Cure Is Worse Than the Disease

The credit markets have been bouncing around wildly as of late, with one Wall Street firm after another – Lehman Brothers, Merrill Lynch, AIG – either merging with a more stable entity or being bailed out by taxpayers. This follows the massive government bailout of mortgage giants Fannie Mae and Freddie Mac, a veritable cesspool of corruption.

How did this come to be? Ironically, from the very thing that is now being proposed to correct it – more government involvement and oversight. The main reason these entities are looking to Washington to be saved is because it was, for the most part, following Washington's orders that got them in financial trouble. They were obliged, in the name of “not discriminating against the poor” to lend to those who were unlikely to be able to pay back what they had borrowed.

Then, when those risky borrowers inevitably defaulted, how else was the lender to get back what they had lost other than to go back to Washington and say “You made me take this silly risk, now save me!” And if politicians were reluctant to do so, just shovel some money into their campaign coffers to help them decide. The lenders and politicians would thus make out fine in the end, while taxpayers get stuck with the bill for all that malfeasance.

It's an object lesson in moral hazard – when you remove the direct consequences suffered by the individual (be that a person or company) for having made a bad choice, you get more bad choices because there is no longer any risk of punishment. It's no different than a trapeze artist trying a triple somersault with the net below to catch him should he miss the swinging bar, but sticking with a simple single somersault when there is only cold, hard concrete into which to smack. The presence of an ostensible safety device actually motivates riskier behavior.

Any time government sticks its nose where it doesn't belong, moral hazard and perverse incentives propagate. From welfare that encourages single motherhood, to health care that encourages overconsumption of services and thus skyrocketing costs, to insurance that encourages re-building of homes in flood-prone areas, the examples are legion. And now we're supposed to believe that a problem largely created by government in the first place will be solved by even more government in the second place? Are we nuts?

We need to get it out of our heads that government is responsible for providing our material needs (or wants, as the case may be). That is the genesis of this whole situation, and the result is going to be outright socialism. How did the federal government ever get into the mortgage business in the first place? Certainly there's nothing in the Constitution authorizing lending or the insuring/guaranteeing of others' lending.

Because we've adopted the Marxist belief that housing is a “right.” Hence the existence of a bureaucracy like Fannie and Freddie. The same goes for health care (Medicare/Medicaid), retirement pensions (Social Security) and education (public schools). Even though a “right” to any material good or service necessarily enslaves the provider thereof by removing his free choice, we've plowed right ahead with the removal of individual responsibility and thus freedom and liberty with it.

We're now at the point where even insurance (the AIG bailout) and charity (e.g. hurricane aftermaths wherein government is presumed to be the option of first and often only resort) are on the verge of being consumed by the federal leviathan. When does it stop? Or do we just keep feeding the beast in the naïve and vain hope that it eats us last?

And I haven't even touched on the whole fox-guarding-the-henhouse angle. If there is one thing this debacle has made clear, it's that putting Washington and Congress in power over anything other than what the Constitution explicitly allows is asking for disaster. Increasing that power by placing ever more areas of life under their “regulation” and “oversight” will only result in more corruption. Think about it – why else were Fannie and Freddie donating so furiously to the re-election fund of the Democratic chairman of the committee that regulates them?

Talk about a cure that's worse than the disease.

The answer is to get government out of both sides of the equation, neither telling lenders how to lend nor borrowers that they're entitled to more than they can afford to pay back, nor bailing either out if and when they make ill-advised choices. That is what got us into this, and to continue to do it even after a bailout costing taxpayers trillions would be the definition of insanity.

And if that sounds to you like a financial Wild West free-for-all, just ask yourself this: Could it be any worse than what has resulted from having had Washington involved? If the credit crisis is the consequence of the presence of a government safety net, we ought to fly the trapeze of life without one from now on.

© 2008 North Star Writers Group. May not be republished without permission.

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