Slowing the Recovery

Published September 12, 2008

Dear Editor:

David Lazarus’s article hits the nail on the head regarding the government’s bailout of mortgage giants Freddie Mac and Fannie Mae. The bailout, 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 cost of which now falls to the taxpayers.

The government’s attempts over the past decade to promote and sustain economic growth through monetary mechanisms continue to have repercussions in credit markets today. The Federal Reserve’s fiscal policy created an artificially low interest rate that drew borrowers, lenders, and investors into making risky deals that were not based on true market factors.

The bailouts of Freddie and Fannie may prove to be a critical error in the long run. In order for an economy to grow and evolve, investment and capital need to move naturally where they are most efficiently used. Relying on stringent regulation and government control to save credit markets and the economy will only slow the recovery, prolonging today’s downturn.

This does not excuse the corrupt actions of lenders or the irresponsibility of borrowers, but it does create doubt about the government’s ability to address the crisis through its interventionist fiscal policy.

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