What Happened to Market Discipline?

Sept 24, 2008 — -- Barack Obama says, "[Today's economic problems are] a stark reminder of the failures of ... an economic philosophy that sees any regulation at all as unwise and unnecessary".

What? Does that mean that until last week the Bush administration embraced the free market? Nonsense. Governments at all levels have regulated and subsidized the housing and financial industries for years. Nothing changed under President Bush.

The government-backed Fannie Mae and Freddie Mac were created precisely to interfere with the housing and mortgage markets. In effect, Freddie and Fannie diverted money to people who wouldn't have qualified for mortgages in a real private market.

Had actual private companies performed these activities, they would have been subject to market checks. But they were not. The results were predictable.

Now that it's all tumbling down, the politicians and pundits blame the free market.

It's not simply misunderstanding. It's demagoguery by people who will never admit that their "progressive" social policies have spawned a taxpayer bill that boggles the mind.

This is a story not of private enterprise but of cynical political opportunism. Moral hazard -- the poisonous mix of private profits and taxpayer-covered losses -- is what you get when politicians indulge their hubris to redesign society. The bailout of those companies holding bad mortgages -- big-business socialism -- sets us up for the next crisis.

Maybe the Republican presidential candidate will dissent? Not a chance:

John McCain says, "We are going to fight the greed and irresponsibility on Wall Street. These actions [leading to crisis] stem from failed regulation, reckless management and a casino culture on Wall Street. … We need strong and effective regulation … ".

He proposes a new bureaucracy, the Mortgage and Financial Institutions Trust (MFI), which he says will "provide troubled institutions with an orderly process to identify bad loans, provide funding and eventually sell them at a profit. … The MFI will supervise the sale of loan assets at market prices and purchase them as necessary".