Sunday, September 28, 2008

"How Your Government Can Wreck Your Economy and Get Away with It" in 6 Easy Steps

1. Set up a Mechanism to Launder Risky Home Mortgage Debt. Create an agency whose sole purpose is to "offer liquidity to the secondary mortgage market." The agency will guarantee home loans for a small "insurance" fee, or it will buy them and repackage them as "mortgage-backed securities" also guaranteed to pay, regardless of default. Set low standards for the types of loans that will quality, and make sure your fees are low so lots of people will sign up for your insurance. Sell these new low risk securities into the financial markets. Viola! You make risky debt look good, and sell it to "suckers" thereby providing liquidity to the mortgage market. Oh, it's true that some of them won't fall for it, but all we need a few, the dumber ones, and the ones who know what's going on, but who are hoping to find a sucker of their own to pass the buck to. Oh, almost forgot. Make sure you set up this agency as a "private" company. Imply that you'll save it if it gets into trouble, but don't promise it explicitly. Give it a nifty, folksy name like Freddie Mac or Fannie Mae.They'll love that.

2. Force banks to offer Risky Debt. What? Not enough people are helping you issue risky debt? Well, that's easy. Just pass a law that forces banks to lend to high-risk prospects. Tell them you won't let them do things like merge with other banks unless they can prove they are issuing risky debt the way you want them too. Make sure the law states that they specifically shouldn't look at things like applicants' income, or current assets when making decisions about them. If it doesn't work so well at first we can just revise it, so our money laundering agency gets into the act too. Oh, name again. We certainly don't want something like the "Let's Issue More Risky Debt Act", so we need something that will tug at their heartstrings. Got it! the "Community Reinvestment Act"! They'll love that.

3. Hold interest rates down so anyone can afford Risky Debt. OK it's starting to work, but still not enough risky debt to clobber the economy. We need more time! A delaying tactic. Wait! We control interest rates right? Shoot let's just keep interest rates low for a while. We know low interest rates stimulate potential new risky debt holders to go ahead and get that house they can't afford. Do that for a couple of years and we'll have risky debt all over the place!  Oh, once again, we don't want anyone to know. Let's wait until we have some sort of minor crisis and say we're doing it to help "stimulate" the economy. How about that "Dot com bubble" we just had? Oh, and we need some cover again. Let's get some free-market guy to advocate it. Some pragmatist who's advocated some pretty strong free-market principles but who'll sell them out at a hat drop, and whine about it afterward that he didn't know. What? Robert Stadler isn't available? How about that Greenspan guy? Yeah, they love him.

4. Make it a moral, noble action to take out Risky Debt. Proclaim that every citizen should indulge the noble dream of home ownership. That buying a home is good for the economy; that it's the government's duty to help you afford your new home purchase, and it's your duty to help out the economy. Use the full power of the largest public relations machine in the free world, the U.S. Government, to trumpet the notion. This is the key, of course. Now when Joe Citizen shows up at his local bank and wonders why his banker doesn't ask him about his income, he won't second guess it because he knows that what he's doing is good for the economy. When Joe Banker sells of his mortgage to Freddie, and wonders how it is that Freddie can afford to guarantee what he suspects is a risky debt, he won't think to ask, because it's the government's duty to see that everyone has a home. Oh, I just get warm and fuzzy thinking about it.

5. Wait. That's it. Just let the machinery work. After a few years, Risky Debt will be everywhere. Some people will be worried, but our PR will have worked on most. Even if they're worried, they'll think about how noble and selfless they're being and all that worry will just evaporate in a cloud of happy thoughts.

6. Blame the Free Market. The implosion will happen. What sets it off will be immaterial because the mechanism, the time bomb, will have long been in place. Everyone will be powerless to help it. We will be too, but think of the mileage we'll get by blaming the free market! We'll get to nationalize things, and give out tons of money. We'll call those Wall Streeters "greedy" bastards, call for their heads, take away their companies. Everyone will come to us for help, and we'll tell them we will, even though we can't really. We'll ask for broader powers. Say that we need to be left alone to handle things the way we see fit. And they'll give them to us, of course. Because they won't know any better.

Now I certainly don't want to imply some sort of conspiracy on the part of government here, but the cause and effect I've outlined is real. It is the cause of this financial mess we're in. And it has nothing to do with the free market. But after all the finger pointing at the greed of the businessman I've heard spewed in the last few days, this version pales in its sinister quality, and the actual actions line up better with the facts on the ground. Free-market intellectuals know this and they are saying so, Bank CEO's, the ones who weren't duped by this trickery, know this and they are saying so.

There is one action on this list however that was taken, consciously and consistently. #4 - making it a noble, moral action. You cannot go anywhere today and not hear the resounding chorus. Man is too selfish and greedy; it is his duty to help those less fortunate; we are our brothers' keepers; it is right for government to force this to happen; people rise to their highest when they pursue a "cause greater than self-interest". It doesn't matter if all the other actions above are mistakes. #4 is not, and from #4 all the others necessarily follow. #4 is known as altruism, and it has only one known antidote, rational self-interest as a moral code, and a politics based upon individual rights.

From his recent The Objective Standard article "The Resurgence of Big Government", ARI Executive Director Yaron Brook states it better than I can:

If selfishness and the profit motive are immoral, then no wonder they are blamed for any and all economic crises. Nor is it any wonder that the government—which we are assured is not self-interested—is posited as the solution to such greed-induced crises. Politicians and bureaucrats, we are told, are working not for their own benefit, but for the “common good” or “public interest.” Thus, economic disasters cannot be their fault; the blame must lie on the shoulders of greedy businessmen.

Because Americans accept the notion that self-interest is morally wrong, they have come to equate businessmen with crooks, on the grounds that both pursue self-interested goals. The argument goes, in effect, like this: Left to his own devices, free from the watchful eye of our public servants in Washington, a businessman will try to make a buck by raiding the cookie jar rather than by producing and selling cookies.


Americans must come to understand that appeals to the “common good” and the “public interest” are not moral claims but licenses to evil. Because the American public is just a number of separate individuals, whenever some group trumpets action in the name of the “public interest”—say, a new prescription drug benefit or Social Security scheme—it is declaring that the wishes of some individuals trump the rights and interests of other individuals. But everyone has a moral right to pursue his own happiness, free from coercive interference by others. If it is to have a legitimate meaning, the “public interest” can mean only this: The rights of each and every individual are equally protected by the government.

If Americans want to turn permanently toward a genuinely free market—and thus toward peak prosperity—they will have to reconsider their moral convictions. They will have to discover a new morality, one based on the requirements of human life and backed by detailed arguments and demonstrable facts. This is what Ayn Rand offers in her body of writings. She is the only champion of capitalism who would and could defend capitalism on moral grounds, as indicated by the radical titles of her books Capitalism: The Unknown Ideal andThe Virtue of Selfishness. Those who want to fight the trend toward statism—those who want to effect a real and lasting turn toward capitalism—would do well to study her thought.

The people who know what's going on are saying so. I'm saying so. It's time for you to do the same.

1 comment:

Anonymous said...

Excellent article. I'm tired of the media and government declaring how Wall Street created this mess.