Tucson CitizenTucson Citizen

Free market didn’t cause crisis – and government can’t fix it

The conventional wisdom on the credit crisis for many observers has been that free markets created the crisis, and government is going to solve it.

In fact the very opposite is true, and the Bush administration’s decision to strong-arm the nation’s largest banks into allowing government to buy in and undoubtedly begin dictating decisions will make the situation much, much worse.

Twenty-four times in the Constitution and 23 times in the Bill of Rights the words “no” and “not” are used to restrain government power, as in “Congress shall make no law” and “the right of the people . . . shall not be infringed.”

Ignoring that injunction, Bush, Treasury Secretary Henry Paulson and other government leaders recently frog-marched executives of the nation’s largest financial institutions into a room without telling them why they had been hauled there.

They then made these executives sign away a portion of their businesses on the government’s “take it or take it” terms.

A government whose easy credit policies, loan market manipulation and counterproductive regulatory machinery got us into this crisis is now injecting itself into the nation’s financial system in ways that were almost unimaginable just a few weeks ago.

Paulson recently announced that the federal government is sinking $125 billion of taxpayers’ money into Citigroup, JPMorgan Chase, Bank of America, Merrill Lynch, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon and State Street Bank.

In return, the government will get, among other things, a 20 percent ownership stake (on average), restrictions on executive pay and promises the banks will pay a 5 percent dividend on senior preferred shares, rising to 9 percent after five years.

“These are healthy institutions,” Paulson told reporters Tuesday, “and they have taken this step for the good of the U.S. economy.”

No, they took this step to avoid the wrath of government. These healthy financial institutions did not need or request government money or a partial government takeover.

Paulson, with the president’s full support, has put citizens who did not make bad investments or borrow more money than they could afford on the hook for these hundreds of billions of dollars.

Citizens also are on the hook for the additional hundreds of billions the government earlier pledged to insurance company AIG, the government-sponsored mortgage giants Fannie Mae and Freddie Mac, investment bank Bear Stearns and other companies.

Taxpayers may also be hit up for hundreds of billions more to buy short-term corporate debt and they will be hit hard by much higher price inflation if the government continues to loosen the money supply.

None of this is necessary, and all of it is wrong.

A fundamental condition for economic growth is risk and reward. People take risks. They earn rewards if those risks pan out, and they take their lumps if they don’t.

That ensures people on the whole will make the best decisions possible and this perpetual weighing of risks and rewards usually keeps things from going too far in any direction.

When things do go too far – as when the government floods the economy with easy credit and uses the tax code and lending regulations to encourage loans to people who should not have them – there is usually a “correction,” and should be.

We’re seeing one now in the housing and credit markets as house prices fall and credit tightens.

The government is recklessly doing all it can to stop this necessary correction, sending government deficits and the national debt skyrocketing and manipulating markets in ways almost sure to have awful unintended consequences.

There could be a terrible price to pay for these government actions. Unfortunately, those who stand to pay the dearest are ordinary citizens, not the politically connected millionaires and billionaires and their agents who made the decisions that caused the supposed crisis and who should be the ones to pay for it.

E-mail: sstanek@heartland.org

Steve Stanek is a research fellow in budget and tax policy at The Heartland Institute in Chicago (www.heartland.org).

Citizen Online Archive, 2006-2009

This archive contains all the stories that appeared on the Tucson Citizen's website from mid-2006 to June 1, 2009.

In 2010, a power surge fried a server that contained all of videos linked to dozens of stories in this archive. Also, a server that contained all of the databases for dozens of stories was accidentally erased, so all of those links are broken as well. However, all of the text and photos that accompanied some stories have been preserved.

For all of the stories that were archived by the Tucson Citizen newspaper's library in a digital archive between 1993 and 2009, go to Morgue Part 2

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