Lies the government told you by Andrew Napolitano (best e reader for epub TXT) 📗

lending to risky borrowers, and taxpayers got stuck with the risks and the eventual losses.

Yet, even with all the laws and regulations around, the government continues to blame deregulation and the “free” market. How it can do so with a straight face, considering that we have “seventy-three thousand pages of detailed government [economic] regulations,”3 is beyond me. And the regulations and government intervention are directly to blame for the mess we are in now, no matter how hard the government tries to lie to us and blame Wall Street or Main Street or deregulation. It was the government that encouraged, enticed, and compelled banks to loan to people whom they would usually deny as bad credit risks.

It was the government that created the Department of Housing and Urban Development (HUD), which guaranteed billions of dollars in loans. And, of course, if a loan is guaranteed by the government, there is no reason for a bank to look at the borrower’s ability to return the money.4 Slowly, too, HUD lowered its standards, and the government’s approval for granting mortgage insurance became almost automatic. Such guarantees brought about new banks, like Countrywide Financial, which were opened around the nation, centered on serving that portion of the population that could not get “prime” loans because of poor credit history, and providing them with “sub-prime” mortgages, sometimes with no money down, to buy houses they could ill afford.

Many were expecting house prices to continue to rise and therefore bought million-dollar houses on incomes of less than $30,000, with no money down. So when the housing bubble burst, as all bubbles eventually do, these people had mortgage payments due that they could not afford, and their houses were worth less than the mortgage that they had to pay. So the banks foreclosed on homes that were not worth the money that had been loaned in order to purchase them.

These same mortgages had also been wrapped up into securities, called mortgage-backed securities, which were then sold by the banks to investors, which provided the banks with additional money to make more loans. Sometimes Fannie and Freddie were the investors. But the value of these securities depended on the mortgage payments being paid in full and on time. When the housing boom collapsed and people stopped paying, these securities became worthless, and losses of billions accumulated in those who had invested.

Many of those who had invested were investment banks, which then had losses of billions, and they collapsed as well. The market went into free fall, largely because the government induced and forced banks to loan to people with poor credit, because it felt that everyone deserved affordable housing and so it had to provide it, through any means necessary. But what the government tends to forget is that there is no such thing as a free lunch. So now, we will soon be paying in higher taxes and inflation for the so-called “affordable housing” that the government was desperate to provide.

The Bailout: Free Money for the Incompetent

By bailing out banks and related companies, the government has essentially ensured what it claimed it was trying to prevent, market instability. Now that certain firms are aware that they are too big to fail, they will be much more likely to engage in riskier investment schemes. They are aware that if their risky investment fails, the government will ensure their survival, and if it succeeds, there will be a large payout, as there is with any risky investment that succeeds.

But the payout will be theirs and theirs alone. As the Wall Street Journal so aptly described the process, “[t]heir profit is privatized but their risk is socialized.”5

Economists often state that the Great Depression was inordinately long, due in large part to the inflexibility of wages and other forms of government intervention.6 The government responded by printing money, artificially stabilizing prices, employing the population on worthless projects, and thereby, according to the Austrian economists, expanding the Great Depression by around fifteen years.7 The Great Depression was “great” because of its duration (from 1929 to 1946) and its duration was assured by FDR’s central planning.

On the other hand, when the stock market crashed on October 19th 1987—a day known as Black Monday—and the Dow Jones dropped 508 points in one day,8 while 205 banks failed that year,9 President Reagan ignored the cries for help and did nothing. The government took not one step to intervene in the markets, though panic was widespread. Within a few months, the market stabilized and prosperity came slinking back. It has now been nearly eighteen months since the markets had their September 2008 collapse, and as much as the Federal Reserve is claiming that things are looking up, the markets are unstable and unemployment, even with the Bush and Obama bailouts, is over 10 percent.

Everyone claims that the bailout of the system is necessary in order to prevent another Great Depression. Yet, as Llewellyn Rockwell has pointed out, “[it] makes no sense to warn that we will repeat the past if we fail to do the things that actually made the past as bad as it was.”10 Maybe, rather than emulating a government that prolonged the Great Depression, we might think about emulating the administration that managed to allow Black Monday to be only a three-month-long affair.

President Reagan’s chief economist, Arthur Laffer, has explained that the Obama $780 billion February 2009 stimulus plan, just like the Bush February 2008 $200 billion stimulus and the Bush October 2008 $700 billion TARP plans, will drive the country to economic ruin.11 Laffer argues that these stimulus packages will have the same result as the $85 billion bailout of AIG, most of which money has ended up with the banks as beneficiaries and the taxpayers as the payees.12 The bailout plan is essentially Robin Hood, except he is taking from the rich and poor alike to give to the extraordinarily wealthy. As Laffer notes, “There is no tooth fairy. Every dollar given to someone comes from someone else.”

Since the