"If the major opportunities for future growth of government lie in the area of conventional taxation, are there any defenses available to the citizenry? ... Perhaps the most fruitful advice comes in two parts. The first piece of advice is to avoid war and the rumor of war: this is history's greatest boon to the tax man. ... The second piece of advice is to seek ways of inhibiting government's ability conveniently to increase its collections. Possibly the very increase in that ability that is in prospect can be turned to account by a constitutional provision which forbade the income tax, and perhaps even the storage of information regarding individual incomes by third parties, including government." ~ Benjamin Ward
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Everyone seems to agree that the mess in the money trade stems from profligate mortgage lending half a decade ago; banks loaned large sums to people with poor credit rating, then sold the mortgages in bundles with other, better-quality notes, then those were resold throughout the industry, and so when some borrowers failed to repay to the terms agreed, everyone was stuck with bad paper, meaning that their assets failed to match their liabilities, and Uncle had to bail them out.
Those seem to be the facts. There's less agreement about who is to blame.
Shall we blame the borrowers, for failing to keep their word? Yes, to a point; promising to pay $750 a month for 25 years is a serious obligation, and to walk out on it is not generally an ethical thing to do. However, the subject mortgages were "pushed" onto a class of person already notorious for failing to honor contracts (except for IRS "debts," that's what a low credit score indicates), so the blame should certainly not stop there. Additionally, these unsophisticated borrowers probably made the fair assumption that the value of the underlying security would keep on rising, perhaps after having read my 2006 "Real Estate Racket" piece, so would suffer a serious shock when, a couple of years ago, that stopped happening--often at the very time their monthly payment was scheduled to increase. Why, some would ask when observing that they owed more than the property was worth, should I keep paying off a mortgage when I could just hand the keys back to the bank?
How then about the lenders; did they cause the mess? Again, yes, they helped. Consider a free society, in which all players are free to do as they wish but on their own responsibility. You are invited to lend $100,000 to someone with a bug-infested home in a bad neighborhood who has not shown he's eager to honor contracts. Would you? And if you did, would you charge just the usual 6% interest, or thereabouts? To ask the question is to answer it; you would almost certainly not, but if you did, you'd make sure you charged double or triple that rate so as to offset some expected bad loans. And you would not offer a 90% or 100% mortgage, but cap it at, perhaps, 70% so that if it went bad, you'd have a fair chance of repossessing the property and selling it quickly to recover the loss. This is all obvious and elementary--in a free society.
There would be some, concerned to give a helping hand to the less fortunate, who would club together to start a fund to lend money to such borrowers at low rates--but they would be charities and would know it. They would expect to lose some money, and would treat such losses as charitable giving, pro bono publico. For that reason, their notes would not be easy to sell to other financial institutions; the club would bear its own risk but everyone would be content.
But during the last decade, that is not at all what has been happening. There were some possibly well-meaning idiots who wanted to help the less fortunate by taking a non-market level of risk, but they did it with someone else's money; and that is not charity but theft, fraud, or both. Sheldon Richman identified the smoking gun as the Community Reinvestment Act, as updated periodically since first enacted in 1977; mortgage lenders were commanded to push money at these subprime borrowers, and so they had to obey; they behaved as no rational, free-market, self-interested lender would ever dream of behaving.
So we come to government, which wrote that Act and similar ones to distort the operation of the money trade; is it to blame for the mess? Absolutely it is, and not just by obliging rational lenders to make irrational loans. Government also made it easy, especially since 2001, by lowering the Fed rate and so pumping "money" into the economy--cranking the printing press, if you will. Lending banks then had a stick to make them take inordinate risks and a carrot to provide the means to do it. Throw the money out there, sell the note someone else like the quasi-government Fannie Mae and Freddie Mac, and all will be well. The newly-created fiat money not only facilitated the loans; by empowering buyers to bid higher, it stimulated inflation of the prices of the properties the loans were to finance. And there was an implicit promise that if things went badly, Uncle would rush to the rescue, and last week that promise was made explicit--to the tune of nearly a trillion of our dollars, which we'll be paying in terms of double-digit inflation starting next year.
Now we can see the symmetry of this mess. It came about because money was created out of thin air and made to flood the mortgage market; and is now allegedly being cured by creating some more money out of thin air and made to flood the balance sheets of the lending industry. It came about because government prohibited rational free choices in mortgage lending by its regulations, and it is allegedly being cured by writing extra regulations--perhaps, ones that contradict those in place--further to inhibit rational free choices in mortgage lending, for both the leading Presidential candidates promised only last week to do that, so exhibiting their absolute lack of interest in rational free-market economics. And it came about because borrowers had all their lives in government school been taught that they had an "entitlement" to other peoples' money, and it is allegedly being cured by demonstrating they were quite right. As Anthony Alexander so often says, there is no rational alternative to the free market.
Out of the mess has arisen the rumor that we are about to enter a deep depression like that of the 1930s. Is it true?
There are eerie parallels, so it could be so; but it's worth noting what they are, and what they are not. In both cases, the trigger was a market crash following a bubble (in 1929 of stocks, in 2008 of housing), and in both cases the bubble and crash were caused by an injection into the economy of fiat "money" by the government. But the 1929 crash did not cause the Depression, it merely created circumstances in which one could easily arise; all previous crashes worked themselves out in a couple of years because the market was free to fix them. In 1930-45, that could not happen because of massive and repeated government intervention, as Rothbard so expertly proved in his indispensable America 's Great Depression. The question for us now is therefore: Will government today intervene again, causing new, huge disruptions--or has it learned anything in the last half century? Early indications of the answer to that are clearly that it will intervene and has learned nothing; again, both Presidential candidates are promising new rules for the finance business, and the influential leftist commentator Mark Shields observed last Friday on the "Lehrer News Hour" that "at a time like this, nobody is a libertarian"--that is, everyone wants government to do something. Everyone he knew, presumably; everyone in the government industry. He was surely correct.
On the other hand, FDR was breaking new ground as a fascist; he was finding out what worked and what didn't, and even his adversaries knew nothing of what we have learned in the years since. Today, the fascists of D.C. have over half a century of experience in how to milk the capitalist cow without causing its demise, and we their adversaries are a whole lot better informed and a whole lot more articulate--and we have the Internet, and are not shy about publicizing their malfeasance. There are fine think tanks with considerable influence and scholarship (even though they fail to see the obvious--that government is an entity necessarily hostile to humanity which must vanish altogether). These factors may well moderate the malfeasance and prevent a full-blown depression.
There is a final factor, that is different between 2008 and 1929: a considerable subset of those adversaries understand how a zero-government society would work, and why one is absolutely necessary for the survival of the human race, and some of us have started to cause one actually to come about in short order. On reasonable and stated assumptions, that process will take its good effect as soon as the 2020s; so even if government does cause a depression in the next decade, when we emerge at the other end, we will never have another.