The Backlash of the Financial Crisis

by Alfonso Grimaldo

The international financial crisis, commonly known as the “credit crunch crisis” (which gives for very nice alliteration) is probably the worst economical disaster we have experienced as a generation. And the effects are not only felt by the United States, but they ripple through international waters with the force of a tsunami.

It has led to the largest bankruptcy in U.S. history, the nationalization of many foreign banks, and has given a new meaning to the word “volatility” with regards to the stock markets (with the famous Dow Jones Industrial Average, a stock index reporting on the performance of major industrial players such as Coca-Cola and Microsoft, plummeting around 5279 points since December, 2007 to October, 2008 – compare that to the 1641-point rise during the same period last year – the bigger the numbers, the higher the volatility).

The jury is still out on the precise causes of the international financial crisis, but there is a pretty good general idea about how the subprime mortgage market set the foundations for this calamity. One of the possible causes that the economists are working with is deregulation. In fact, Senator Barack Obama mentioned this in the second presidential debate, when he stated that the biggest problem that led to the financial crisis was “the deregulation of the financial system.”

Libertarians are popularly known to be the promoters of small government, deregulation wherever possible and the expansion of personal freedoms, so we have to worry that a misperception of the causes of the global financial crisis will result in a backlash of excessive regulation, increased government powers and the general decay of popular trust in the free market.

Barack Obama was one of the first to take a jab at deregulatory policies, incorrectly labeling them Bush-era doctrine, and summarizing them comically as stripping away “regulations, consumer protections, let[ting] the market run wild, and [then] prosperity would rain down on all of us.”

This is a dangerous characterization, and one we see snowballing every day. “The free market is to blame!” is the general cry of the affected citizenry. This scapegoat however, distracts us from the massive governmental intervention that is taking place in order to keep the markets floating.

However, the opposite is true. It was regulation and governmental intervention that set the foundations for the subprime mortgage crisis, and the current global disaster.

There are many examples of this, but the prime one takes place in 1977, when the 95th U.S. Congress enacted the Community Reinvestment Act, which fundamentally sought to prevent redlining (which is when a bank refuses to provide mortgage services, or increases the cost of them, with regards to certain “risky-borrower” groups, such as low-income families, Hispanics or African-Americans).

However, in a practical sense, the CRA pressured (or motivated, depending on where you stand) banks to lend and accept mortgages from, as U.S. Congressman Ron Paul states, “people who normally would be rejected as bad credit risks.” The CRA was mainly an evaluation-centered piece of legislation, designed to establish criteria for Federal financial supervisory agencies to follow when reviewing banks.

The CRA was well intended and worked. In fact, one can assume the CRA helped mortgage denial rates lower from 29% in 1997 (a few years before it was reformed to encompass even more banks under its scope) to 14% in 2002. The effects, however, were catastrophic.

Some will say that there is no proof that the CRA was the origin of the subprime lending crisis. I partially agree. It wasn’t just the CRA, but many factors coupled with government intervention (which, I must admit, was originally intended to generate benefits, not calamities). When the housing bubble burst in late 2005, the results were inevitable. Barron’s magazine, a weekly issue of the Dow Jones & Company group, announced in an August, 2006 article by Lon Witter that “a housing crisis approaches.”

What is important now is to keep the faith. The financial future of the U.S. and of the whole world is very unclear at this point in time. Sure, in hindsight, when this is all over, we’ll say, “Oh, right, should’ve seen that one coming.” But right now, we’re living day by day, seeing what happens to the financial markets, and more importantly, to the general people.

We must prevent a possible future crisis, one regarding the trustworthiness of the market. The critics of the free market and deregulatory practices are having a field day blaming libertarians, classical liberals and anyone who ever muttered the phrase “deregulation” placing the burden of the crisis on our shoulders. The backlash that is coiling itself to strike may be more dangerous than the current crisis itself, as it may lead us into an era of protectionism, market intervention, government bloating, paternalism, dependence on the establishment, and a general limitation of fundamental liberties.

This is not a slippery-slope argument, but a logical development. When we depend on government (through bailouts and market interventions), rather that the other way around, our most [sarcasm] noble and trusted [/sarcasm] politicians have us in a very slavish position. It is not uncommon to see the elimination of certain liberties in times of great distress, supposedly to provide us with greater security (be it personal or financial).

Though I point fingers in this article, I must state that blaming must be placed under solving in our priority list. Member of the UK Parliament, and Leader of the Liberal Democrats, Nick Clegg argued in a recent session of Prime Minister’s Questions that “when a ship is sinking, we send out the lifeboats. We do not argue about who has steered it into an iceberg — that is a debate for another day.” I agree with that sentiment.

To wrap up, the free market is not good or evil, it is amoral, and how it acts is most often the result of its components. We’re currently facing an economic disaster, and we can choose to run to the arms of Papa Government and expect him to make everything alright (he won’t), or we can provide incentives to creative solutions and let the market do what it does best: provide what we, the consumers, need.

Now, more than ever, we need those creative solutions; solutions that only a free market can provide.

By Isaac M. Morehouse

An article I wrote over at Mises.org:

As the presidential election nears, I hear more people voicing their fear over the prospect of the other candidate winning. People from both major parties express genuine trepidation at the thought of a world without their candidate as commander in chief. Both sides believe we will lose our freedom if the wrong party wins.

Perhaps surprisingly, I think there's a lesson to be learned in all this from Hollywood.

The 1994 movie Shawshank Redemption is the fictional story of Andy Dufresne, a prisoner at the infamous Shawshank Penitentiary. One of Dufresne's fellow inmates, Brooks Hatlen, has spent nearly his entire life in Shawshank, and has settled in to the routine and become the prison's bookkeeper. After a lifetime in prison, Hatlen is finally freed as an old man. Once on the outside, Hatlen finds life beyond bars too complicated and confusing, too new, too risky. He cannot cope with this newfound freedom after a life of bondage and, tragically, he commits suicide.

Brooks Hatlen forgot how to be free. He became accustomed to bondage and let the yearning for freedom die within him over his long stay in the penitentiary.

Andy Dufresne, on the other hand, never let his freedom die. While locked in Shawshank, despite oppressive and often gruesome circumstances, Dufresne's spirit was unshakable. He constantly cultivated the seeds of freedom in the least free setting imaginable. When Dufresne escaped, unlike Hatlen, he embraced life in the free air and pursued his dreams.

The difference between these two men had nothing to do with their physical circumstances; both were in prison. Yet Andy Dufresne, even while imprisoned, was still free. No bars or guards or hardships could take away his freedom. Hatlen had lost his freedom, and even in the absence of physical oppression, he was still a prisoner. An individual who wants to be free can be, no matter what the world brings. An individual who has let the spirit of freedom die will never be free, no matter what the world brings.

The idea that freedom is simply a state of mind may sound trifling, especially when considering some of the unimaginable horrors faced by unfree peoples across the globe. But even political freedom cannot be had without a people who keep the spirit of freedom alive within themselves; and if they do, political freedom is often not far behind.

Lawrence Reed, president of the Foundation for Economic Education, tells an inspiring story of an underground band of freedom fighters in formerly communist Poland. Their spirit of freedom was kept alive despite a tyrannical Communist regime. Indeed, they not only held onto their belief in freedom, but they spread it, often at great risk to their lives. When the Communist authorities finally announced that they were relinquishing their power the reason they gave was that the Polish people had become "ungovernable." No regulations, no prisons, no secret police, no propaganda, no physical or political suppression could take away the people's freedom. They were free, whether the government liked it or not.

Keep this in mind as America's government changes with each election. Remember this when you see government expanding its reach into your life. Rather than looking to political leaders to protect or expand our freedom we should cultivate the seeds of freedom in our own spirits, and inspire others to do the same. Nothing government can do can take away our freedom; and if we are a people who are truly free, the government will have to follow.

Special Comment: Olbermann's Man-Crush

By: Matt Fay

"All men having power ought to be mistrusted"

- James Madison, "Father of the Constitution"

I have discovered a fun game to play around 7pm CST every week night.  Instead of watching sitcoms or sports at this time, I now flip back and forth from MSNBC's "Countdown" with Keith Olbermann to FOX's "O'Reilly Factor" with Bill O'Reilly.  Watching their shows has seemingly become a running - and fairly immature - argument between the two pundits.  The political slants of Bill O’Reilly as a commentator (and FOX News as a network) are fairly obvious to anyone with even a modest interest in politics.  MSNBC is now rapidly becoming the liberal version of FOX News with Keith Olbermann as its standard-bearer and a serious case of what "The Daily Show" with John Stewart has dubbed “Obamania.”

Free Markets and Free Speech

By Isaac M. Morehouse

From the Shotgun Blog, where they are spending this week celebrating free speech:

People who wholeheartedly support free speech and other social or “civil” liberties often have no problem opposing free markets. Unfortunately for them, social freedom and economic freedom are inexorably intertwined.

If government has the power to regulate economic activity – grant licenses to businesses or tradesmen, regulate accounting practices, implement workplace safety regulations, etc. – then they inevitably have the power to restrict social freedoms, not least of which is free speech.

I have personally met many business owners who have strong opinions on issues, but who would never voice them or fund organizations that advocate their position because they fear having their license revoked, or being denied a permit. These are not stories of people in the former Soviet Union, these are actual everyday citizens the U.S.

In my home state of Michigan, the Department of Environmental Quality is particularly troublesome and has extremely broad discretion in granting licenses and stopping businesses from engaging  in peaceful activity. They can classify literally any piece of land as a “wetland”, and prohibit development. They can arbitrarily require hundreds of thousands of dollars in changes to septic systems, parking lots, seawalls, and more. Many of these decisions are made entirely by field agents and can be decided by nothing more than his or her mood. Others come from the top of the department down.

Tax laws are also notoriously complex and nearly impossible to comply with. I’ve spoken to accountants who tell me that if ten different accountants ran the typical business tax return they would come up with ten different results. I’ve even been told if the same accountant ran the same return ten times he would likely come up with ten different results. When the laws are this complex, it means that at any given time nearly every citizen is likely to be in violation of some tax law or another. State treasury departments or the IRS, if they really wanted to, could find some way in which everybody was out of compliance.

What does this mean for free speech? It means that at any time government agents or their bosses in the executive or legislative branches can, if they so choose, deny licenses, impose costly requirement and find out of compliance anyone that voices opinions they dislike. This is a reality, not a worst case or slippery slope argument. Thousands of business owners find themselves in trouble with regulatory bodies when they stick their neck out to oppose government. As I said before, I have met dozens of business owners who refuse to get involved in political issues, at least not while they are in the middle of some ridiculously long licensing or inspection process.

Remember that every new regulation on the market is another tool in the chest of those who wish to restrict free speech.

Congratulations U.S. Taxpayers!!!

By Isaac M. Morehouse

You are the proud new owners of your very own shiny "football" team!

9/11+ 7

By: Matt Fay

It is hard to believe that it has been seven years since that fateful Tuesday morning.  In some ways it seems like just yesterday, in others, a lifetime ago.  It would be hard for anyone not to remember where they were or what they were doing when the Twin Towers collapsed.  There were acts of heroism and bravery that most could not fathom - the FDNY rushing into the towers to evacuate survivors before the collapse, the passengers of United flight 93 taking the plane down before it could be crashed into yet another building.  The political establishment even seemed to step up their game at a time when the country needed them most.  Today, seven years later, there will be many remembrances - those by family of the victims, firefighters and police who were there or lost friends, and many others too numerous to name.  

Drugs and Church

By Isaac M. Morehouse

My wife and I were visiting a new place for Sunday morning service this week and I couldn’t help but be disturbed yet again at the tendency of Christians to mistake political accomplishments for spiritual ones.

The pastor told a story about a small church that is located in a “rough” neighborhood. Some parishioners were on the corner outside the church praying for the area when they ran into some drug dealers. (I’m not sure how the churchgoers knew them to be drug dealers). The dealers told the prayers, “This is our corner” and the interceding churchmen replied, “No, this corner belongs to Jesus”. The pastor said one of the drug dealers was visibly moved and walked away saying, “This isn’t right what we’re doing. I’m going home”. The rest of the drug dealers stood their ground, so the church members retreated back into the church. So far, an interesting story.

Then, the pastor told us, the police showed up and arrested the remaining drug dealers on the street corner. Everyone listening to the story started clapping and shouting “amen”. The pastor used the story to illustrate the effectiveness of prayer, and the transforming power of the church located in the rough neighborhood.

This was all rather unsettling to me and my wife and as we discussed on our way home. Combined with the abysmal performance of the Detroit Lions, it put a bit of a damper on my day.

The part of the story where one drug dealer felt some kind of conviction and went home was interesting. The faith and words of the Christians on the corner apparently got him thinking deeply about his life. But what about those arrested by police? What victory is there for the church in that? There was no mention of any violent acts by these men. There wasn’t even mention of a violation of property rights (it was never clear if the corner was part of church property). There was only an assumption that these men were somehow “bad” and therefore their arrest was somehow “good” for the neighborhood, and ostensibly the Kingdom of God.

But how did this event advance the Kingdom of God? Is not the point of the Kingdom to transform lives? Is not the point to demonstrate the power of Christ to forgive and to move individuals to break free from the bondage of sin and embrace His forgiveness and live freely and righteously? What did this confrontation and arrest do for these men to help them see their need for freedom in Christ?

Moreover, what grounds is there to cheer “amen” at the arrest of these men? It betrays a notion that runs deep in the church; that political action is analogous to spiritual action. This same conflation was demonstrated some years ago when members of my church collected petition signatures sufficient to force a strip club to move from downtown to a location outside of town. This was touted as a victory. But in spiritual terms, who won? Did any of the petition signers go down and offer hope and freedom to the men in bondage to sexual addiction? Did they offer comfort and companionship to any of the strippers who were, purportedly, desperate for money and approval? Was a single soul set free? Did the patrons of the establishment have a new respect for Christians after seeing them forcibly remove the business from town? If anything, it set the stage for a more hostile relationship between strippers and patrons of the strip club and Christians. Banning sinful behavior by force of law is no signal to sinners that they can come to the church for freedom and aid.

Christ did not behave this way. Even when given the chance to use the laws of the day to punish a prostitute, He instead offered her grace and left her to make the choice on her own. He did not petition to hide sinful behavior from His sight, but spent much of His time hanging out with the least reputable sinners of society. He offered them hope and escape from damaging behavior, not prison.

When Christians look to laws of man to accomplish goals of the Kingdom they distort and corrupt both. All earthly governments are based on force. The Kingdom of God is based on love, freely given and freely received or rejected. Even the despotic, egotistical, and violent Napoleon saw this clear distinction in his last days exiled on the Island of St. Helena:

“Alexander, Caesar, Charlemagne, and I myself have founded great empires; but upon what did these creations of our genius depend? Upon force. Jesus alone founded His empire upon love…”

Why does the church so often fail to see what Napoleon understood? His Kingdom is truly, “not of this world”, and we shouldn’t reduce it to the activities and tools of earthly kingdoms – force, fraud, pomp, and patriotism.

Risky Business

By Isaac M. Morehouse

In a recent post from the Shotgun Blog, I question the government's role in reducing/controlling risk:

"In his book, The Armchair Economist, Steven Landsburg describes a study on the results of seatbelt laws – another risk reducing mandate. What did he find? The more people wore their seatbelts the more car accidents occurred, resulting in an increase in deaths and injuries.

Why? Individuals increased the risk level of their driving to make up for the risk eliminated by wearing a belt. The number of car crashes increased as people drove more recklessly, but the crashes resulted in fewer deaths and injuries because of the belts. So it canceled out, right? Wrong. Guess who doesn’t benefit from a seatbelt in a crash? Pedestrians. Deaths and injuries from accidents involving pedestrians increased, bringing the total number of deaths and injuries up above what it was before the seatbelt law. An outcome lawmakers didn’t predict.

You might find this hard to believe – would people actually drive more recklessly to make up for the risk that was reduced when they buckled up? Humans make detailed risk calculations like this every day. Each of us has a level of risk we are willing to tolerate in each circumstance, no more and no less. You are willing to increase your chance of death by getting in a car just to pick up a candy bar at the gas station. You may even do so if the road is wet. But if it’s icy, it may no longer be a risk you are willing to take. If roads are dry, however, you may increase your risk by driving faster – if doing 55 on a wet road was okay, on a dry road it may fall below your risk threshold.

Landsburg also discussed studies where individuals were given scalding hot coffee in a paper cup. They dropped it immediately so as not to get burned. But given coffee in a ceramic mug they took the burn while they set it down gently. The brain calculated what a burned hand was worth instantly – more than a paper cup, but less than a ceramic mug. We can calculate risk at amazing levels of speed and detail and we make decisions that keep us within our preferred level in each situation.

Human behavior cannot be willed-away at the whim of the legislature. If you pass this law those drivers who would’ve talked on their cell-phones will engage in some other risky behavior to compensate for it and return to their preferred level of risk.

That is the result of human choice and freedom. Risk is what makes decision-making possible. Risk also brings reward. Risk is an integral part of a free-society; it makes life worth living. A world without risk would be little more than a sterile experiment in a padded cell."