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For most politicians, especially those facing an election in less than a month, looking good to the taxpayer is important. Anyone familiar with the Presidential and Vice Presidential debates knows how elected officials love to boast about fighting corruption, saving taxpayer money, and most recently, directing angry diatribes towards unpopular figures — and unfortunately for the market, Wall Street has never been all that popular with “Joe Six-Pack.”

With the markets more or less in Washington’s hands at this point, and with the Treasury’s hands deep within the pockets of the taxpayer, it seems appropriate to consider just how daft those hands are. For a little insight to the political mindset, Senator McCain finds blame in “unbridled greed” on Wall Street. Obama, meanwhile — while saying that he’s “above partisan politics” — blames the GOP and McCain for the problems. Perhaps these claims are true; however, I’m more inclined to believe that Wall Street did not implode without some outside help.

Fundamentally, the subprime mortgage bust of last year and last month’s liquidity crisis do not represent a failing of capitalism. It does not mean that free markets have failed our country, and as such, I am wary of any bailout plan that lays the blame for our current economic troubles solely at the feet of the financial industry.

Some blame greed for our problems. It makes a nice moralistic argument about the corruptions of modern society, but as it relates to Wall Street, it doesn’t explain their failings. However, immorality does explain the actions of the group that is most culpable for our current economic crisis: the government.

Over twenty years of bad government led us to where we are now. So, the $700 billion Troubled Asset Relief Program (TARP) should be seen not as a bailout of fat cat investors, but instead as the time to pay the Pied Piper.

The underlying cause of the credit crisis stems from last year’s subprime mortgage fiasco, which itself resulted from the bursting of the housing bubble. These events have the government’s fingerprints all over them.

To start with, look at the policies of Washington on housing. Homeownership is the political Holy Grail, and every politician savors the ability to brag to their constituents about voting to help the homeowner. Bonus points if those new homeowners are from minority groups. Consequently, we’ve seen the powerful influence of groups such as the Association of Community Organizations for Reform Now impact the directives and legislation from Capitol Hill.

Chiefly, the government has pushed lenders of all types to make more loans and more credit available to borrowers who would not normally qualify for a loan. When more people had mortgages, there were more prospective homebuyers, which drove up the cost of housing through basic supply and demand. Hence, the government has played a pivotal role in the housing bubble.

Washington’s legislation also had a profound impact on Fannie Mae and Freddie Mac, the mortgage giants recently taken over by the Feds. For the purpose of promoting homeownership among the lower and middle classes, the Department of Housing and Urban Development (HUD) set targets for the percentage of loans Fan and Fred had to make to anyone earning less than an arbitrary amount. Strangely, the same groups that hailed this a way to promote equality are the groups that now grouse about the practice of “predatory lending,” or when banks supposedly make loans to people with poor credit at high rates.

The politicians did not stop there, however. During the Clinton administration, the Community Reinvestment Act (CRA) was given new teeth to encourage banks to promote the “common good.” Effectively, it did to all of Wall Street what the HUD had done to Fan and Fred. Any bank that didn’t jump through hoops to satisfy these demands ran the risk of being sued for redlining or discrimination.

Of course, the idea of a “common good” here ignores the basic capitalist tenant that what is good for the individual benefits society in the long run. The CRA focused on the shortsighted goal of increasing homeownership, which served to fulfill the even shorter term goal of helping politicians win reelection.

As we’ve seen all too much recently, populism has again returned as a viable political strategy in Washington, with the presidential candidates using the “people vs. Wall Street” rhetoric to great impact. Unfortunately, it’s succeeding, because American’s are constantly inundated with either what Fox News called the journalist technique of “apocalyptic” headline stories (ironically, they were talking about their own website) or attack ads from candidates who love using the Street as their scapegoat. Who said yellow journalism was dead?

Worse than the government’s incompetent handling of housing has been their attempts to fix what they often deem to be the free market’s inadequacies — never mind that their meddling caused the problems in the first place.

For example, The Wall Street Journal reports that last month, Senator Harry Reid casually referred to “A major insurance company — one with a name that everyone knows that’s on the verge of going bankrupt.” While not naming names, Reid’s tremendously irresponsible action encouraged speculation and fear that caused insurance stocks to tank the following day. Similarly, Chuck Schumer suggested earlier this summer that the regional IndyMac Bank “could face collapse.” Predictably, IndyMac collapsed after spooked investors pulled their money out of the bank, a classic run caused by a loss of confidence.

There is a reason the Fed only announces the closure of a bank after they have sufficient evidence to do so. Politicians suggesting that a major financial institution could fail should inspire a similar outrage to Hillary Clinton’s comment that she should stay in the primary because Obama could meet a fate similar to that of Robert Kennedy. While technically correct, statements like these do not inspire confidence.

Before condemning everyone from the Beltway as babbling dolts though, it is important to remember that some light occasionally breaks through the black hole of good ideas. The Federal Housing Regulatory Reform Act of 2005 stands as a good example of what is both right and wrong about Washington. The act itself called for what I called for in a previous article: a stronger regulator for Fannie and Freddie. However, it was killed off in a party line vote.

More applicable to today, though, are the names attached to this bill. John McCain cosponsored it, and Barack Obama fell in line with his party and voted against change for the better. Certainly, Republicans do not advocate reckless deregulation. Instead, they just realize the difference between more regulation and more effective regulation. Many of the banks who failed this year were among the most heavily regulated institutions in finance, and they were paralyzed by potential losses that result from “mark to market” accounting. Bad regulation can sink companies faster than any greedy CEO.

This brings up the idea of “moral hazard.” Whenever this phrase has been used before now, it has typically referred to the danger of rewarding banks or individuals who made poor decisions. However, the phrase is more appropriately applied to the government’s impact on housing. Irresponsibility and opportunism infests our government’s actions regarding the economy and housing. Politicians are not economists, and worse than simply ignoring their advice, they often mock it as out of touch or naïve.

This brings us back to today. TARP has become law, and the political class is crowing about how they needed to rescue Wall Street to protect Main Street. And they’re right. Without the bailout, the liquidity crisis would have gotten worse before it got better. Credit has dried up, and even sound companies like General Electric are feeling the squeeze. There’s no denying that something had to be done, and Treasury Secretary Hank Paulson’s plan represented a simple, elegant, but effective solution.

The Relief Program will work, because it will restore investor confidence, and restore banks confidence in each other. Last week, banks went to the Fed, the traditional “lender of last resort,” for a record breaking amount of overnight loans. When banks are afraid of lending to each other, they don’t even think about lending to consumers. And without consumer lending, housing prices continue to fall, and the crisis continues until we reach a painful bottom. TARP will help prevent that.

Recovery now depends on the government’s ability to keep its hands off of Wall Street and let banks do what they know is best for themselves, because what’s good for the banks is good for the economy, and what’s good for the economy is good for the American people. From the lowest day laborer to the Fortune 500 CEO, everyone benefits when the economy grows, because unlike income redistribution schemes that simply chop off future growth to make everyone worse off, capitalism brings up the entire boat.

Finally, capitalism is still our best and only option for a viable economy. Anyone who thinks that patently moronic laws like the Community Reinvestment Act represent a free market environment is on the same plane as someone who thinks Barack Obama’s economic plan is socialist: flipping the adjectives there produces a statement that’s much closer to reality.

This country’s economy needs reform, but not the kind currently being proposed by Congress, and not the knee-jerk populist positions of our presidential candidates. We need to acknowledge that not everyone has the capability to be a homeowner, and that income equality is not a measure of how well a country is doing.

We need policies that encourage homeownership among those who can afford it and economic growth plans so that anyone who can’t afford a home can work to achieve that goal. As such, we need to embrace lower taxes, a minimal government presence in the private sector, and as voters, responsibility for our elected officials. We need a return to capitalism.

Joe Maurer is a member of the Class of 2012.