Market Failure: Government is the Problem

The candidates rushed out statements on the Wall Street meltdown yesterday. According to an Obama-friendly piece in the New York Times McCain blamed greed on Wall Street and Obama blamed lax regulation during the Bush years.

It’s a pity that both candidates seem to be clueless.

This meltdown has government failure all over it. Let us count the ways.

1. The first cause is the reckless expansion of credit during the early 2000s as the Federal Reserve worked to head off the threat of deflation. The Fed kept the spigots on too long, as usual, taking two years to raise interest rates from the low of 1 percent up to the middle fives.
   
2. Then there’s the sluicing of money into the housing market with Fannie and Freddie. Sensible people have been warning about Fannie and Freddie for years, but Congress, and mostly Democrats in Congress, have resisted reform.
   
3. There’s the specific distortion that the Clinton administration wrenched into the housing finance market. An Investors Business Daily editorial fingers the guilty parties. The Clintonoids used the Community Reinvestment Act to force banks to lend more money to low-income borrowers. That set up the sub-prime market, and set up the current meltdown.
   
4. Greed on Wall Street. Yes, there’s plenty of that. And unfortunately the easiest way to make money is to game government subsidies and market distortions for a quick buck.
   
5. Lax regulation. Well, the regulators always seem to be a day late and a dollar short. How about we reform the system to force more equity into it. It’s the highly leveraged setups that lead to trouble (think 90 percent mortgages on homes as well) because when you are highly leveraged you can find yourself underwater as soon as the market turns south.
   

The current mess is mostly the creation of government power and the natural instinct of politicians to sluice taxpayers and bondholders money to their favorite special interests.

The beautiful part about this system is that when the whole mess hits the fan, the authors of the mess are usually long gone, and the blame attached to the poor saps who inherited the mess.