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The Government’s Chickens Are Back
When a private company screws up, there is no shortage of people demanding more government intrusion in the marketplace. But when the government screws up, they don’t call for less government. They call for more.

The economy is slowing down, and the government is at fault. But, if anything, the policymakers and pundits want the government to do more of what got us into trouble in the first place. If a lot of poison is bad, a lot more is somehow good. That’s the logic of statism.

Make no mistake: the government is the cause of the slowdown. The trigger was the housing problem — the surge in mortgage defaults and foreclosures, and the fall in home values. The government has been all over the housing industry for decades. Through various devices the politicians have made it easy for people to buy homes, even those who had poor credit and zero savings. There was a time when a young couple just starting out would work hard for several years to save up a down payment for a house. But thanks to the policies of Congress and agencies such as FHA, people could realize the “American dream” with almost no effort. One could buy a house with virtually nothing down. Government guarantees kept mortgage rates lower than they would have been. This was considered good social policy, but we should be suspicious when government claims to be helping people. It has no resources that it hasn’t first taken from someone else. Any pledge it makes is a pledge of the taxpayers’ money.

Next, in the name of social justice, the government pressured lenders through the Community Reinvestment Act to write mortgages for low-income people with bad credit. This is a source of the subprime mess. The loosening of lending standards was also encouraged by the government-created agencies Freddie Mac and Fannie Mae, which buy mortgages from the original lenders, bundle them, and sell securities based on the resulting income stream. The Federal Reserve’s long-standing readiness to bail out banks and other lenders that get into trouble was another step toward the government-caused crisis.

The result of this intervention is known as moral hazard. If government places a safety net under lenders and borrowers, it encourages bad loans. Imagine that the losses of a gambler in Las Vegas were underwritten by the government. Would he be as careful as he is when he has to cover his losses himself? If any of this is reminiscent of the savings-and-loan fiasco of the 1980s, it should be. The government’s guarantee of deposits freed the S&Ls to make imprudent investments. The consequence of that policy cost the taxpayers a pretty sum. ...