Shortsighted Crisis Management

So now, the Federal Government is going to take on all mortgage debt in order to bring the credit crisis to an end. The good news is that this is causing a major rally on Wall Street and in financial markets overseas. The bad news is that it is going to make it that much harder to resist the spread of government.

The government’s bailout plan could cost as much as $1 trillion. Its success largely depends on having the money the government loans to end the crisis get paid back and no one really knows whether that will happen. The worst part, of course, is that moral hazard is now part and parcel of our economy for some time to come. Businesses will now feel freer to make risky decisions with the belief that if things go wrong, the government will be around to bail business out. Of course, no business leader deliberately wants to fail but that’s not the point. The point is that businesses will take larger chances than they would if there was no government backstop to put a halt to excessively risky decision making. That, plus government’s now-massive reach into the financial markets makes for a significantly less free economy.

Just as ridiculous is the decision by the SEC to ban short selling. It is beyond me why this is a big deal; short selling involves borrowing stock from a company, selling it at market price, betting that the market price goes down and if it does, buying it back, making a profit and giving the stock back to the company. It is speculative activity and why speculative activity should be blamed for the downturn in markets is anyone’s guess. Betting that the stock price will go down so that you can buy it back at a profit is not the same as causing the stock price to go down so that you can buy it back at a profit. We were told a few months back that speculation caused increases in oil prices. Now, evidently, speculation causes decreases in stock prices. Soon, speculation will be blamed for crabgrass in our lawns.

This will be remembered by most people as the beginning of the end of the credit crisis–assuming that the government’s bailout plan works. But it will do nothing for the long term health of the economy, which relies on the existence of a free enterprise system. We are setting ourselves up for more government regulation in more areas of the economy down the line. Once the Regulation Genie is out of the lamp, he shows very little willingness whatsoever to go back in. And this will only be to the detriment of the American economy in the future.