Message #2467

[Ted S]

That the Government cause recession is absurd, the Government regulations such as EPA, Wall Street, the Banking industry, minimum wage, OSHA etc has to be greatly improved! Regulation of the dope industry (drug companies) has to be enforced and also greatly improved.

Regulations sometimes actually achieve the result they are after but too often they also produce a host of unintended consequences.  Liberals are great at envisioning the intent of some regulation but are not good at seeing the negative side effects.  Thomas Sowell calls this the inability to see beyond stage 1.  The democrat party is the party of stage 1 thinking.

Like any good disaster there are many contributing factors but the top 2 for the recession are:

1. The Federal Reserve's artificially low interest rate.
2. Fannie Mae and Freddie Mac's government guarantee of success.

Interest rates are prices.  Prices are signals and incentives.  Low prices entice people buy when they wouldn't under normal circumstances.  Think of any really good sale price and the hoards of people who will stand in line for what is being sold.  I have a personal story of this phenomena.

The federal reserve sets interest rates arbitrarily.  Had the market been allowed to set interest rates (the price of borrowing money) the rates in all likelihood wouldn't have been so low and certainly not that low for such a long time.  In a nutshell, the Federal Reserve set the price of borrowing so low for such a long time that they created a huge amount of malinvestment in housing stock.  People bought more and businesses built more than was truly needed because the price was so low.  This artificial pricing is called regulation and it was done by the government.

Fannie Mae and Freddie Mac are/were government sponsored entities.  GSEs.  These two quasi-private businesses had guarantees from the government that any financial gains that they made, they would keep, and and losses that they made, would be covered by the taxpayers.  They were/still are in a win/win situation.  There was everything to gain and nothing to lose.

This put Fannie and Freddie in a spot where they took abnormally high risks because their success was guaranteed.  More properly put, there was no chance of failure.  It was like being told that any winnings at the casino you could keep but if you lost everything, not to worry, somebody else would make you whole again -- in the case of Fannie and Freddie, that somebody was the taxpayer.

This unique privilege Fannie and Freddie enjoy is called government regulation.  Had those two quasi-private companies been part of a truly free market their leaders would have know that overly risky lending practices would have resulted in their demise.

And that's just to name two.