Throughout the history of our great nation, we have seen a gradual loss of our economic freedom which has resulted in worsening economic conditions along with a massive national debt that has outpaced the size of our entire economy. The economy has suffered some major blows from crises that have occurred, such as the Great Depression and most recently, the Housing Bubble in 2008. However, the only thing that could make these things worse is how the government intervenes into the market and “save” the economy from itself.

I explained in a previous post against the Federal Reserve how its credit expansion policies ultimately created distortions in the stock market that led to its eventual crash; but this time I’m going to set my sights on another crisis: the Housing Bubble and the regulation of the US financial system.

Whenever there has been a major economic crisis in the US, the government has always seized the moment when it can extend its tentacles into the economy without any public opposition. For instance, in the wake of the Great Depression and the beginning of the FDR Presidency, FDR made gold ownership illegal, further solidified the banking cartel known as the Federal Reserve system, distorted self-correcting forces in the market by keeping wages and prices 25% higher than the original market value while unemployment remained high, and afforded anti-trust protections for over 500 industries that entered into collective bargaining agreements and raised higher wages which effectively killed market competition and hurt smaller industries. The UCLA Newsroom highlights the failures of FDR’s anti-competition policies as previously mentioned, namely the issue of artificially raised wages and prices:

 High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns,” Ohanian said. “As we’ve seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market’s self-correcting forces.

Government capitalizes on economic crises by seizing controls that are relatively unneeded. Keynesian critics argue that the Depression came about due to an unregulated market and a lack of price controls in the market; this is wrong. Fortunately, the myths of the Great Depression have been dissected and defeated by the logic of Austrian economists such as Ludwig von Mises and Milton Friedman who have actually spent their years in the study of economics. In spite of their efforts to explain the crisis, it was overshadowed by mere speculation of an under-regulated market while overlooking the policies of the Federal Reserve.  Even UCLA economists readily admit the “surprising” failures of the FDR administration in curbing the Great Depression.

Now that I have recapped the historic nature of government crisis management in the Great Depression, I will focus on the recent Housing Crisis in 2008 and how it was ineffectively managed. To put it in a nut shell, the Federal Reserve utilized its “quantitative easing” policies to inject more credit into the housing market in an effort to spur affordability for individuals to buy houses, effectively misplacing financial resources and artificially reducing prices below market levels. According to The Economist, housing prices on average nationwide fell by 34% in 2006. As we have seen with the Federal Reserve’s policies of the past and present, there has always been a REAL bust to follow ARTIFICIAL booms in sects of the economic system. The Housing market was enjoying a cozy period of prosperity, but all the while the financial bubble was inflating until it finally peaked and then things got worse. Market forces began to react against the artificial changes brought about by the Federal Reserve and housing prices skyrocketed, economic resources were diminished and distorted, and individuals found themselves struggling to make ends meet on housing payments because Federal Reserve policies phased out and reality set in. Housing prices are on a rebound and the Housing bubble bust isn’t even over yet! Needless to say, due to the failed quantitative easing policies of the Federal Reserve, individual home owners now find themselves looking for cheaper housing because they struggle to pay for current housing while the only ones who benefited from the crisis either had prior knowledge of the impending crisis or were your typical Wall Street banksters to begin with.

Unfortunately, the Federal Reserve managed to escape most scrutiny and the blame, instead, was wrongfully placed on a so-called under-regulated financial system and mortgage market. As a response to the “lack of regulation,” the following measures were put into place:

  •  Dodd-Frank Wall Street Reform: This is arguably one of the worst regulatory bills to have passed in a long time. Costing approximately $21 billion, this law grants new regulatory authority to the Federal Reserve in the form of an inner group known as the Financial Stability Oversight Council (FSOC). The authority calls upon the Fed to seize regulatory control over banks and bank holding companies with assets greater than $50 billion. Not only that, but the FSOC would allow for the Fed to seize control over non-banking financial institutions if in the event the FSOC “perceives” them to be a threat to financial stability in the US. Furthermore, the law creates a safety net for the larger firms that receive competitive protections from the government and further emphasize the “too big to fail” concept. American Enterprise Institute Research Fellow of Regulatory Policy Peter Wallison discusses how this bailout safety net (funds from either TARP funds or directly from the tax payers) ultimately protects the larger firms while creating incentives for creditors to pursue lending deals with the large firms versus the smaller, unregulated firms, that otherwise would have a better chance to compete with the protected, larger firms. This is essentially the monopolizing of the financial system that is ultimately driving out competition while doing nothing to improve the lives of the consumers.

Looking at our anemic financial sector today, it is safe to say that our financial sector is worse off than before. Furthermore, failures of the expansionary policies of the Federal Reserve have been misplaced onto a so-called “lack of smarter regulations.” Sound familiar? These same things were said of the Great Depression and like that crisis, blame was misplaced on a freer market instead of interventionist policies that the market HAD no control over! If anything, government interference in the market place has led to further complications in the economy.

This conundrum of market intervention because of some crazed notion that the market needs to be “saved from itself” is ridiculous and we should have learned by now. But due to political agenda engineering, there is this compulsive nature in which government feels that it must correct problems in the market that the market generally does NOT create.

Moral of the story is that if we are ever going to be serious about being economically prosperous again, we need to really re-think our policy intervention into the market and come to the realization that credit distortion, misplacement of economic resources, price increases due to inflation, and artificial increases/decreases in wages and prices not only damage the economy, but they also do not originate from the free market itself. The problems derive from the Federal Reserve, onerous regulatory red-taping of bureaucracy, and higher corporate taxation that drives jobs away from the US economy. Let the market handle itself. The government clearly can’t handle the job.

-Nathan

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