Friday, September 26, 2008

The Triumph Of Ideology Over Common Sense


The following op-ed appeared in today’s San Francisco Chronicle:

While congressional leaders continue to struggle to produce an agreement on the $700 billion financial bailout, now is the time to ask: How did we get into this predicament?

The Federal Reserve’s 2001 – 2003 expansionary policy – with its rock-bottom interest rates – triggered the real-estate boom. But lack of market regulation, oversight and supervision lies at the heart of the problem.

President Reagan said, “Government is not the solution to our problems. It is the cause of our problems.” The unarticulated corollary to that doctrine was: Unfettered markets are the best providers of goods and services. That’s true but, as we have seen, there are exceptions.

The Bush Administration and the Federal Reserve bet the ranch – and a lot of peoples’ homes – that the market could deal with all issues. Folks would borrow; firms would lend; houses would be built. No problem.

Federal regulators warned the administration and the Fed that lenders were encouraging borrowers to take on excess debt on terms they could not afford. But the administration and the Fed turned a deaf ear and hoped that rising real-estate values would save everyone.

When defaults and foreclosures began to rise, the administration and the Fed invoked the doctrine of moral hazard and said they did not wish to encourage risky behavior by assisting those that had loaned and borrowed recklessly. When financial institutions began to fail, the administration and the Fed rescued some but refused to help all.

Now we are at the end of the road. No more pretending. The market failed – and failed spectacularly. With the entire financial system on the verge of dysfunction, the administration and the Fed came forward with their rescue plan. Since they refused to provide the ounce of prevention, we now await the efficacy of the pound of cure.

What an irony that the administration and the Fed, whose free-market ideology abhorred regulation and warned against moral hazard, devised a bailout that entailed the greatest moral hazard in our nation’s history. We will, after all, rescue the lenders who brought about this massive crisis for $700,000,000,000. An unbelievable sum of money.

We are in this pickle because, from 2001 through 2008, the administration and the Fed let Ideology triumph over common sense. Government regulation may not always be the answer, but a little more of it would have helped.

© 2008 Michael B. Lehmann

1 comment:

Paul said...

In his OpEd piece discussing the $700 billion financial bailout proposal (“Triumph of ideology over common sense,” Sept. 26), professor emeritus of economics, Michael Lehmann, is quick to point the finger of blame at the expansionary policy of the 2001-2003 Federal Reserve and the Bush Administration. Certainly, this is partially true; but this amazingly selective, and history-ignoring assertion is anything but entirely accurate or fair. Whether Professor Lehmann is ignorant of history, or just plain partisan is unclear; but it is nonetheless astounding to read such statements from someone who should know better.

Thirty years ago, the issue of “redlining” was the media topic du jour. The claim from Congressional Democrats was that banks and mortgage lenders were discriminating by denying loans to blacks and minorities. Enter Jimmy Carter’s Community Redevelopment Act of 1977 where community activist groups such as ACORN would effectively agitate banks to make loans to unqualified borrowers. This gave rise to the “subprime” mortgage. Thus, the root of the problem – Congressional intervention in the free market – cannot be ignored. The largely democrat-populated Fannie Mae and Freddie Mac, encouraged by the unfailing support of democrats like Barney Frank, in light of warnings raised by the Bush Secretary of the Treasury John Snow and John McCain, continued to pressure banks and other lenders to extend mortgages to individuals when their underlying qualifications were either insufficient or nonexistent.

So, to be both fair and accurate, this is not necessarily a failure of Wall Street, capitalism, the Federal Reserve or the Bush Administration solely. This is a failure of injecting political correctness – largely driven by congressional democrats – into the market. Banks made bad loans at the behest of congress. Sadly, the people who caused this crisis – and in some cases benefited from it – will never be held responsible.

Paul Forrest