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Crisis of a lifetime

Economy | Fannie Mae and Freddie Mac rescue promises more instability to come and more government sponsorship of consumption

Issue: "NextGen worship," July 26, 2008

Year-long meltdowns of the real estate market have unsurprisingly reached Fannie Mae and Freddie Mac, two companies associated with half (a mind-boggling $10 trillion) of America's mortgages. Multi-billionaire George Soros warns the world that we could be witnessing "the most serious financial crisis of our lifetime," which in his case includes the Great Depression.

The Depression led to the birth of Fannie Mae: New Dealers created it with the goal of artificially lowering the cost of buying a home, and it became the second-largest corporation in America and a pioneer in a nationwide secondary market for mortgages. The problem is that government interventions in markets often result in gargantuan bureaucracies and monopolies that help certain sectors of the economy to expand temporarily, but at the expense of other activities that are more productive and valued by individual consumers.

The Federal Reserve and the Treasury Department came to the rescue of Fannie Mae and Freddie Mac on July 13, offering to throw them a financial lifeline.

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The Bush administration is asking Congress to temporarily increase lines of credit to Fannie and Freddie and to let the government buy their stock. The Fed has offered to let the companies draw emergency loans.

The pledges of aid raise concerns on Capitol Hill and elsewhere about the government's role in intervening to ease such financial troubles and the risk posed to taxpayers.

Policymakers and cheerleaders of the state's helping hand forget that all government charity comes at the expense of diverting resources away from something else. No free lunch here. Government-guided distortion of incentives in the private sector always leads to malinvestment. The fruits of interventionism are well-known and as old as the rise of the state: economic busts, unemployment, and inflation.

Our housing market and financial institutions are in trouble not because of market failures but because of government sponsorship of more and more consumption-so how can we restore economic health by making consumption still cheaper with loans from the Fed? Economists understand that financial stability is important, but statements like "the company is too big to allow its failure" make no sense. (Just look at the economic effects of prolonging the agonies of former Socialist industrial giants.) Expansionary fiscal and monetary policies may stabilize some stocks for a short while, but the ensuing monetary instability undermines the whole financial sector. That will hurt U.S. interests even more so than a possible quake caused by Fannie and Freddie falling flat.

The U.S. government has long fooled around with the taxpayers' money. Income redistributions have discouraged hard work, charity, and self-reliance. Subsidies for abortion and out-of-wedlock children have harmed America's family structure. We have rewarded citizens for consuming more than they produce with cheap credit and "free" money from our printing presses. Now we are forced to bail out other losers.

Should we reward companies whose bad investments have accumulated $1.5 trillion of debt? Doesn't that teach our CEOs that prudence is no longer a virtue in the business world? What's next? Rewarding McDonald's for investing in beef burgers for the Indian consumer?

-Alex Tokarev is a professor at The King's College, New York City

Alex Tokarev
Alex Tokarev

Alex is the chair of the Department of Business at Morthland College in West Frankfort, Ill., and teaches at Northwood University in Midland, Mich. The native of communist Bulgaria fanatically supports the Bulgarian soccer team, Levski.

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