The professional punditocracy has lamented the worship of free markets and deregulation. Any honest assessment of our current economy must recognize how the private and public sector are awkwardly and inefficiently entangled. The secondary market for housing securities has been dominated by Fannie and Freddie from the moment it was spun off from government. David Oedel states in the Christian Science Monitor:
When Fannie and Freddie were finally nationalized, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke only briefly touched on the issue of what to do with them in the long run. The current thought is to downsize them gradually at a rate of 10 percent per year, slowly privatizing the field.
But a mechanistic form of gradual privatization seems as unlikely to work as the attempted privatization of Fannie in 1968. Why would a private competitor want to compete at all with a couple of subsidized favorites? How can government be in a field without dominating it?
Where I disagree with David is that he pretends in his essay to assume that Fannie and Freddie were private companies like Microsoft or GM. But government sponsored entities are not private entities in the normal sense; they are vain Frankensteinian attempts by the government to have its cake and eat it too in the housing market. In this instance, having cake is letting taxpayers off the hook for financing low income housing, while providing the imprimatur for banks providing low income housing. One may argue this point, but a modest amount of this market intrusion by government was acceptable until the expansion of the Community Reinvestment Act. As a result, the pressure from congress mandating the lowering of lending standards; combined with increased pressure from investors for a good returns, transmogrified these GSEs into an ugly hybrid-a large government sponsored monopoly that cooked the books to keep their stock prices up, and lobbied their friends in congress to cover their butts-the worst of both worlds. What is the equivalent metaphor? We must now have no cake that we can’t eat anyway?
So, no matter what establishment pundits say, this crisis is not a result of free markets running amok. Government of any kind is not good at making profits. It never has been. The only long term, successful investment strategy the government has at its disposal is to coerce citizens to pay taxes, under penalty of confiscation, imprisonment or conscription. The government can’t reliably invest in markets and always demand a positive return. To do so undermines the definition of a market. Sadly, with the investment of many state pension plans in the market, government now demands exactly that. As with Fannie Mae, it is a disaster waiting to happen.
Around the country, states such as California are increasingly burdened with the credit crunch and have been forced to finally set budgetary priorities. Good. The desire of republican (and often democrat) governors to issue bonds simply to meet payroll defies logic. Issuing bonds was what government does to build a new school or highway. Increasingly, it seems these bonds have been issued rather egregiously just to meet payroll or as a stopgap measures. Arnold Schwarzenegger has been particularly bad, and the Californian government has the worst credit rating of any state for some time.
A good market economy requires good fences between government and free market enterprises. Americans don’t want unelected banking or health care bureaucrats dictating policy, or socialized medicine or socialized oil production, they just want clear boundaries between what they are willing to be coerced out of in taxes and what they are willing to risk in the free market.