A Monster of Their Own Creation

Published September 9, 2008

Dear Editor:

In the wake of the Freddie Mac and Fannie Mae bailout, many legislators and members of the media have incorrectly posited that the best way out of the subprime crisis is through government regulation, interest rate manipulation, and subsidies. They argue the current economic crisis is an example of the overall failure of the free market, when the reality of the situation is quite the opposite.

The mortgage crisis emerged largely from the government’s direct intervention in and manipulation of the economy. Programs like the Community Reinvestment Act and interest rate manipulation by the Federal Reserve spawned a new subprime mortgage market, a financial sector now embroiled in controversy and whose collapse triggered the current downward economic trend.

The government’s bailout of Freddie and Fannie and the Fed’s dramatic lowering of interest rates are in many ways socialized financing. Our current system, which forces banks to lend counter to true market signals, greatly increases the risk of failure. The government’s ownership of Freddie and Fannie has now placed a multi-billion-dollar albatross around the necks of taxpayers.

The mortgage crisis, a monster of the government’s own creation, will be resolved not through more regulation, but new ideas growing out of an active private market where competition is allowed to thrive.

Matthew Glans([email protected]) is a legislative specialist for The Heartland Institute.