Published in The Tennessean, Sunday, November 6, 2011
by Richard J. Grant
At a young age I was taught that, were a fire to break out in the stables, I should first cover a horse's eyes with a blanket before leading it to safety. A horse, like other animals and humans, will in a time of trauma have an urge to flee to the familiar, to the formerly safe.
Such human behavior is evident at the time of economic crises. There is a tendency to run to the apparent safety of the very institutions that caused the crisis, some of which continue to burn.
It should be no surprise that Freddie Mac (Federal Home Loan Mortgage Corporation) is asking taxpayers for another $6 billion in bailout money to cover its losses in the July-September quarter. Since the beginning of the 2008 financial crisis, Freddie Mac and its older sister Fanny Mae have burned through at least $169 billion of bailout money. It is estimated that they will come begging for at least another $51 billion in the next three years.
Both of these institutions are creations of government. Freddie Mac was created in 1970 to provide “competition” to the recently, and ostensibly, privatized Fannie Mae. Neither of these companies has ever been truly private. Nor could they be when their core product derives from their power to grant mortgage guarantees backed by the federal government.
Any attempt to insure the uninsurable will, especially when the force of government is brought to bear, lead to loss and corruption in the supposedly insured market. Those who blame the mortgage crisis on “Wall Street greed” are naïve. Greed has always been with us and is benign when the law protects property rights and allows free competition. It was government guarantees and government regulations that encouraged risky behavior and removed the natural checks on greed.
The belief that government can somehow decree an end to scarcity and the risks of life is a symptom of what the late Nobel laureate Friedrich Hayek called the “fatal conceit.” At the heart of this conceit is the belief that some central planner, some governmental institution, could possibly have the knowledge necessary to coordinate all the actions required to achieve their desires.
This is the error of the socialists and all those who assume that government officials have the knowledge necessary to regulate the actions and interactions of individuals in a community. The aspiring central planners seem not to understand that knowledge is dispersed throughout the community and does not exist independently, but is created through the actions of those individuals over whom they presume to rule.
Those who suffer from the fatal conceit are incapable of understanding the damage caused by interventions such as the Community Reinvestment Act. They do not understand that no outside observer, let alone a government official, has the knowledge necessary to direct the lending activity of a private financial institution. Accusations of “discrimination” against banks presume the possession of knowledge that the accusers cannot possibly have.
Eric Holder's Department of Justice, as if to double down on this conceit, has created a “fair lending” unit to toughen enforcement of the laws that pushed banks to increase their subprime lending in the run-up to the previous mortgage meltdown. It is a gift to that subset of voters who are still naïve enough to believe that there must be a horse in there somewhere.
Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.
Copyright © Richard J Grant 2011