Political Paternalism, Not Free Markets, Cause Economic Shocks | AIER

By Richard M. Ebeling

Neoliberalism has become one of the most elastic terms in the political paternalist lexicon. It amounts to whatever the paternalist dislikes, or any interventionist-welfare state policy that has turned out badly from his own point-of-view, but which cannot be admitted to have been caused by some aspect of his own policy agenda. Never having to say you are sorry for your own social engineering failures is central to this mindset.

In Stiglitz’s reading of 21st century history, you would never know that for the five years before the financial crisis of 2008, the Federal Reserve had artificially manipulated key interest rates down to near zero, and when adjusted for inflation were actually in the negative range for most of that time. This had been made possible with a nearly 50 percent increase in the money supply (M2) during this half decade.

Matching this had been a heavily government-created housing boom. Two federal agencies, Fannie Mae and Freddie Mac, had guaranteed and bought up huge portions of the home mortgage market. The private sector home mortgage lenders were told by Fannie Mae and Freddie Mac that they could loan with reckless abandon, with these agencies bearing most or even all the risk if any home loans went delinquent or general bad times were to set in. Fannie Mae and Freddie Mac ended up “covering” about half of all the outstanding mortgages in the United States. 

The financial and housing crisis of 2008-2009 was made in Washington, DC. The instability in the financial and housing markets contained the fingerprints of the Federal Reserve System and the federal agencies that created the “moral hazard” of unsustainable home mortgages once the bubble burst. A free market had nothing to do with it, because these markets were (and remain) hostages of governmental control and manipulation. 


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