Financial Fear Mongering

Written by Patrick Krey

Wednesday, 24 September 2008 08:28

Treasury Secretary Henry Paulson is dramatically warning of dire economic consequences if his 700 billion dollar bailout is not immediately rushed through Congress, which should give us all pause to investigate the details.

Treasury Secretary Paulson After WWII, President Harry S. Truman consulted a group of politicians for advice on how to get public support for his gargantuan foreign aid proposals and the permanent stationing of U.S. troops throughout the globe (what we now know as the Truman Doctrine). A Republican supporter, Senator Vandenburg, told him that in order to gain public support for such a thing, Truman would have to “scare the hell out of the American people.” Truman proceeded to use the politics of fear and accomplished his goals, entangling the once noninterventionist and fiscally-sound United States in one costly international quagmire after another.

Today, another government official is trying to “scare the hell out of the American people.” Treasury Secretary Henry Paulson has been all over the news warning of the dire consequences if his unprecedented $700 billion bailout is not rushed through Congress immediately. The drastic measure sought “would allow the government to buy bad mortgages and other troubled assets held by endangered banks and financial institutions” in an effort to get rid of their bad debt and free up their ability to lend thereby lessening the credit crisis. Truman would be impressed with Paulson’s theatrics on Capitol Hill. Paulson has warned that if the plan isn’t passed, the financial markets will get much worse and the economy will suffer.

Not so fast says Economist Robert Higgs. “Although certain financial institutions are undeniably in deep trouble — difficulties of their own making, we might add — the problems in particular financial circles should be kept in perspective. Note especially that credit markets in general have NOT ceased to operate. Moreover, lenders are extending credit in historically great amounts. To see this reality, however, we must break away from anecdotes in the financial press, which is eager to attract readers, and from fear-mongering by the political class, which is eager to seize more power, and examine the data that describe wider market transactions.” Dr. Higgs goes on to detail that credit is not frozen and that these malinvestments must be liquidated as a necessary adjustment from the housing boom.

What about dealing with the underlying causes for our predicaments? What caused the housing boom and the subprime mortgage debacle in the first place? The oft-repeated explanations from the mainstream media are both a lack of regulation and predatory lending. Like much of what the mainstream media says, these reasons are far from the truth.

Mark Thorton of the Mises Institute contends that too much regulation and the Federal Reserve’s expansionary policies are the true source. “Government regulation is the problem. Since going off the gold standard in 1971 we have experienced a series of bubble and bust cycles in the economy and each time the crisis has been dealt with bailouts, more regulations, and loosening of gold standard era constraints. The money supply as measured by M2 had long been just a couple of hundred billion and is now approaching $8 trillion and we supposedly are still suffering from a lack of liquidity!” [M2 is one of four classifications used to measure the money supply, and a key economic indicator of inflation.] This excessive injection of new money into the system has encouraged serious malinvestments and helped fuel the housing boom and subsequent bust.

What about the subprime crisis? Was it caused by greed or was it government social engineering? The conventional wisdom, spouted by politicians and the media, is that the subprime crisis was caused by greedy bankers using predatory lending practices to trick vulnerable consumers into unfair mortgage agreements. Economist Thomas DiLorenzo has a politically incorrect assessment of what really caused the subprime mortgage crisis. “The thousands of mortgage defaults and foreclosures in the ‘subprime’ housing market (i.e., mortgage holders with poor credit ratings) is the direct result of thirty years of government policy that has forced banks to make bad loans to un-creditworthy borrowers. The policy in question is the 1977 Community Reinvestment Act (CRA), which compels banks to make loans to low-income borrowers and in what the supporters of the Act call ‘communities of color’ that they might not otherwise make based on purely economic criteria.”

So, if the government was the root cause for the housing bust and the subprime crisis, then why should we trust them now when the same perpetrators of this fiasco tell us that we need to bail out politically connected financial institutions? The answer is that we shouldn’t! The American taxpayers, and future generations, should not get stuck with this insane bill and these institutions should be allowed to fail.

So what should we do? How should America’s leaders respond to this fiscal crisis? David Theroux of the Independent Institute advises: “The solution instead is to end the bipartisan, federal-pork fiasco by cutting spending, regulation and taxes and ending the Federal Reserve’s ability to create credit and debt bubbles. Expanding the current bubble further through bailouts will only prolong and deepen the problem.”