Housing Crisis and Credit Meltdown
Many people say the housing crisis and subsequent credit meltdown were caused by inadequate regulation: they’re right. In a free market, business behavior is severely regulated by the potential to lose money when bad decisions are made. What the government did was eliminate that regulation by guaranteeing people against losses, thereby encouraging outrageously risky behavior:
(1) Two government-sponsored enterprises, Fannie Mae & Freddie Mac, bought mortgages from banks, eliminating the risk to banks of lending to people with poor credit and inadequate down payments.
(2) An implicit guarantee by the government that it would bail out the FMs (make up your own obscene alternative meaning for the initials), allowed them to borrow at extremely low rates and profit from accumulating TRILLIONS of dollars of debt to acquire mortgages: they were able to borrow amounts equal to FORTY TIMES their net worth.
(3) FDIC insurance has caused depositors to pay no attention to the soundness of the banks where they keep their money. Thus, prudent behavior by banks not only isn’t rewarded, but is actively discouraged, as they make more money by taking on risk and don’t need to fear a loss of confidence when they engage in irresponsible behavior.
(4) Having a central bank (the Fed) with the power to create money in unlimited quantities creates a false sense of security throughout the banking industry, one which will last until a hyperinflation that destroys the buying power of those dollars makes it clear that the government can’t create wealth just by printing it.
The bottom line is that past government interventions have destroyed the regulatory nature of markets, and the current proposed ones only make it worse. We SHOULD regulate bankers and punish bad behavior. By ENDING government intervention.