Wednesday, October 1, 2008

Is the Free Market Dead?

In times of economic turmoil, everybody's looking for somebody to blame. To Democrats, everything is of course George Bush's fault, and in this case they may be partially right. But they're screaming that the free market and capitalism are dead, and more regulation is needed. I beg to differ, and would argue that regulation caused this crisis in the first place. The President had a responsibility to point out shaky businesses and shady accounting to the public, and then let the free market take care of those businesses as they'd see their stock value fall, forcing them to clean up their act, lest they go out of business. In that way, President Bush failed to keep the public informed about companies who were not operating properly.
What all this economic crisis boils down to is people defaulting on their mortgages. Fannie Mae and Freddie Mac are companies that purchase debt (mortgages) from banks so the banks can have more cash on hand and can then make more loans. These big companies purchased a lot of that debt, and many individuals who owed money were unable to pay it. Like I said, it all boils down to individuals defaulting on their loans. This happened for two reasons:

1) People were living outside their means. When you bite off more than you can chew, you aren't able to pay everything you owe, so this is a lesson in only purchasing what you can afford.
2) Regulation created the possibility for people to purchase houses that really couldn't afford them. The big kicker was the Community Reinvestment Act passed in 1977, and especially the tweaks the Clinton administration added to it. His goals were to emphasize "performance over paperwork", by extending credit to inner city communities. The goal was to give credit to low-income people and raise them up; a reasonable goal of government, but good intentions can lead to problems. As Janet Reno of the Justice Department stated:

“Today’s actions demonstrate that we
will tackle lending discrimination wherever and
in whatever form it appears. No loan is exempt,
no bank is immune. For those who thumb their
nose at us, I promise vigorous enforcement.” (article here)

In other words, the Clinton administration was so hell-bent on preventing loan discrimination, they forgot that, statistically speaking, the groups that were "discriminated against" have statistically bad credit. So go ahead and force banks to loan to low-income, inner city minorities. There's a reason certain people were not granted loans, because they had bad credit. Just don't be surprised when these people that banks had to give loans to (because of Clinton's enforcement) default on their loans and can't make the payments. Big institutions were buying all this potentially bad debt, and here we sit at the financial crisis.

I'm not paying $700 billion in taxpayer funded bailout to help out people who lived outside their means and have to move into a smaller apartment, or to bailout companies who make profit by purchasing bad debt trying to turn a profit on it and cook their books to make it look like the debt isn't as bad as it seems. I'll take the hit in my IRA, because this sets a terrible precedent and sends the message that big companies (too big to fail?) don't have to worry about risk, because if things go bad the government will bail them out. They got too big and too risky, now they have to pay the consequences. Market corrections do that; businesses that were too risky in good times fail and smart ones succeed. We're doing the country a disservice by helping out the unwise ones. Even if we have to take a hit now, we'll all be better off in the long run.

1) Get rid of the bad regulations that extend l0ans to bad credit individuals/businesses.
2) More transparency in these large companies that deal in debt purchases.
3) We need more oversight, rather than regulation, so investors can see exactly what's going on and can make wise decisions and the government can inform us of potentially risky business and the free market will keep people from making those bad investments and likewise improve the companies in question.

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