Things are really a mess economically in the United States and it isn’t really an exaggeration to say it is all Washington’s fault. I mean through the easy money policies of the Federal Reserve, as well as the legislative and monetary support of Congress and the previous administration, many Americans who couldn’t otherwise afford to buy a house bought one. This, coupled with reckless lending policies on the part of primary lenders due to explicit and implicit government loan guarantees, set the economy up for a massive failure. Then, when their low teaser rates readjusted upward, and many could not afford their new higher payments, the housing bubble burst. And what was Washington’s response? It was to provide trillions more in easy money and a policy of encouraging Americans to borrow and spend it to “stimulate” the economy.
Now that that policy hasn’t worked, we are facing a massive debt crisis with real unemployment north of 16 percent, and price inflation eating away at the standard of living in America. If that were not bad enough, last week it was reported that bailout beneficiaries and mortgage guarantors Freddie Mac and Fannie Mae asked the federal government for more bailout funds. Freddie asked for $6 billion more, bringing that GSE’s total bailout figure to $72.2 billion. Fannie asked for $7.8 billion more bringing its total Treasury draw to over $120 billion.
The main reason why Freddie and Fannie are still losing money and require more federal largess is because of the policies coming out of Washington. Freddie reported $4.8 billion in derivative losses alone due to declining interest rates. Fannie’s president and CEO, Michael Williams, claims his firm’s woes are due to homeowners paying less interest on loans refinanced at historically low mortgage rates. So while Washington brought on the original crisis that forced Freddie and Fannie into U.S. conservatorship, its response to that crisis has only made the financial conditions of those entities worse.
At the end of the day, Henry Hazlitt’s words from his famous book, Economics in One Lesson, ring prophetic: “The art of economics consists in looking not merely at the immediate, but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group, but for all groups.”
In both instances, Washington’s policies leading to the financial crisis of 2008, and its policies since, have helped some groups ( i.e. bankers) and hurt others (Fannie, Freddie, and consequently taxpayers). Since no mortal man can determine with precision how a given economic policy of government or a central bank will affect every group in a society, it is best for government and central bankers to abstain from imposing their will on the economy. Certainly we would be much better off now because our economy wouldn’t be in the mess that it is in.