In his weekly radio address today, the President asserted that his proposed financial regulation scheme would end taxpayer-funded bailouts “once and for all,” adding that it would put an end to the “cycles of boom and bust” that have plagued our economy. I would concede that a certain amount of government involvement in the financial system is a necessary evil. Given the complexities of financial transactions, government can play a role in ensuring that all parties to a transaction are fully informed of the obligations they agree to incur and that remedies are available when contractual obligations are not met. I’m all for transparency. But the problem goes much deeper.
The President is arguing that unbridled capitalism results in booms and busts, requiring Washington to fix the mess and save “average Americans” with taxpayer-funded bailouts. He’s got it backwards. Booms and busts are facilitated by government intervention into the capitalist framework, and the very notion of a bailout denies a fundamental principle of a free society, personal responsibility. I have NO OBLIGATION to bail out a bank, an auto manufacturer or any other firm to promote the so-called common good. The “average Americans” he seeks to save are the taxpayers, or at least some of them still are.
Consider the housing market. The free market did not create an oversupply of homes, Washington did. Artificially low interest rates promoted by the Fed, manipulation of lending practices through legislation like the Community Reinvestment Act, and the very existence of Freddie and Fannie have muddled the market. Simply stated, many people bought homes before they were ready financially, or bought more expensive homes than they could afford. Everything went well as long as home prices continued to appreciate. Eventually the bubble burst, prices fell, and the crisis ensued. Washington blamed the evil bankers, but the root of the problem was a fundamental lack of understanding of and respect for markets. Subsidized housing through the Fed, the tax code, or banking regulations artificially increases supply, thereby increasing prices. Sooner or later the house of cards must tumble, which it did. In an effort to fix the problem, central planners in Washington continue to do more of the same. Another bust is inevitable.
Obama doesn’t see the pivotal role government plays in causing economic problems in the first place. His view of economic progress includes massive government intervention that promotes booms and busts. During the booms, successful firms and wealth in general is demonized; the rich just aren’t paying their fair share. During the busts, the left excoriates the evils of capitalism and more government intervention is proposed as a counterbalance. In the end, Washington not only creates a cycle of boom and bust, but also a cycle of ever-increasing regulation, deficits, taxes, and class warfare.
There is a much simpler way to end taxpayer-funded bailouts and substantially reduce the severity of economic cycles. The answer is less government involvement in business activity, not more. Washington should limit intervention into markets to the promotion of transparency in transactions and providing an appropriate legal infrastructure to addressing grievances. If Washington would JUST SAY NO to bailouts, then private investors would take greater steps necessary to protect their own capital and taxpayers would not be on the hook anyway.
The problem here is one of worldview, not just of regulatory specifics. The President either does not understand how the economy functions or is more concerned with social or political objectives than economic growth.