{Note from Bob: This article is reprinted from the newsletter, "Liberator Online" published by "The Advocates for Self-Government" (www.TheAdvocates.org), a non-partisan, liberty-based educational organization. At the conclusion of this article there is a link to another article which, if you're interested, provides a bit deeper explanation. I highly recommend it.}
The questions we're all hearing right now go something like this:
"Isn't the current economic crisis a failure of the free market? Doesn't it show the need for additional regulation and government control?"
The answer: Not at all. The crisis has absolutely nothing to do with the free market. In fact, the opposite is true. This crisis was *created* by massive government regulation and government interference with the market. The government actually over-rode the market, and removed the protections the market normally provides.
First, let's define a free market. A free market is one in which people are free to do as they wish, with their own money and property, as long as they don't engage in force or fraud.
Does that sound like our financial industry? Hardly. The banking, mortgage and finance areas of our economy have been heavily regulated and controlled by the government for many decades. We have no free market in these areas.
Fannie Mae and Freddie Mac, the huge mortgage companies at the center of this problem, are not in any way free market institutions. They are quasi-private institutions granted extraordinary special privileges by the government. They operated for decades with the widespread understanding that, if they failed, they would be bailed out by Congress, using tax dollars.
That doesn't sound like a "free market," does it? One of the chief protections the market offers against the build-up of bad loans is that lenders know they will suffer or go out of business if they make too many of them. Congress removed that crucial constraint.
Further, in the 1990s Congress added enormous incentives and pressure for companies to make risky loans. Congress drastically eased lending requirements for Freddie and Fannie, to encourage them to make loans to poor areas. Congress also began to crack down on banks that did not make "enough" loans, even questionable loans, to distressed areas.
Some of this was a well-intentioned, though badly misguided, effort to help the less fortunate purchase homes.
However, much of this was also due to pressure and bribery by some in the banking, homebuilding and real-estate professions, who wanted such legislation to make themselves wealthy.
For example, Fannie and Freddie engaged in vast lobbying efforts to loosen common-sense restraints for making risky loans. Fannie and Freddie spent over $200 million dollars on lobbying, political activities, and donations to candidates between 1989 and 2008. They actively campaigned against politicians who resisted legislation they wanted.
Is that part of a "free market"? No, it is the opposite. It's a classic example of "crony capitalism" or state capitalism: big business buying favors from government, getting legislation passed that interfered with the market at the expense of the rest of us.
All of this happened during a time when the Federal Reserve System greatly expanded the money supply, making credit easily available for questionable loans and encouraging speculation. The Fed, we need hardly say, is not a creation of the free market. It is a tool of the government, and constantly subject to political manipulation.
Further complicating matters, home prices were rising especially fast in parts of the country where zoning regulations -- another creation of government -- limited the supply of houses and thus artificially increased the price of existing homes. This further fueled housing speculation.
The result of all this massive government intervention was the explosion of high-risk, questionable loans and other expenditures that brought us to the mess we see today. Millions of Americans bought homes they couldn't afford; Wall Street sank billions of dollars into bad investments.
Clearly, this had nothing whatsoever to do with the free market. It was caused by far too much, not too little, government interference in the market.
In a genuine free market, lenders would exercise caution, because they would quickly go out of business if they made too many poor loans. The frenzy we saw in the past few years would not occur.
A free market is the best protection society has against such a destructive build-up of bad investments.
The answer is not more regulation. It was regulation that made this mess possible. And any new regulation will be written by politicians under the influence of the very corporations being regulated.
The answer is the ending of the disastrous and destructive government interference in the finance industry, and the creation of a genuine free market.
LEARN MORE: A excellent longer article to share with those who are unconvinced, and one from which I drew some information for this column, is "An Open Letter to my Friends on the Left," by economist Steven Horwitz: http://myslu.stlawu.edu/~shorwitz/open_letter.htm
{Note from Bob: I wish Mr. Horwitz included his "Friends on the Right" in the article title. They seem to know just as little about the situation as does the left.}
Sharon Harris's One Minute Liberty tips are archived at: www.theadvocates.org/one-minute.html