A great depression is a scary thought. We’ve all seen the pictures from the 1930’s with people in lines for blocks and blocks. The business cycle regularly experiences downturns, slowdowns, recessions, corrections and depressions. Should government be intervening in the cyclical nature of the market?
There have been three great depressions in the history of the
Each time period had 2 critical common factors, easy credit (money) preceding the depression and government intervention to manipulate prices during the crisis.
After skyrocketing home prices slowed in 2006, the stock market peeked, signaling a slowdown to the housing bubble. In 2007, foreclosures increased and several mortgage dealers were dismantled such as the bankruptcy of American Home Mortgage and the acquisition of Countrywide by Bank of America.
By late 2007, illiquid assets were beginning to be offloaded at fire-sale prices to correct balance sheets. Unfortunately, nosy government wanted to play. On Dec. 12, 2007, the Federal Reserve announced the “Term Auction Facility” which it would then auction reserves at the “Discount Window” against a broader range of collateral than had previously been allowed.
In March of 2008 we had the Treasury and Federal Reserve again stepping in to give loans to J.P. Morgan to purchase the nearly bankrupt Bear Stearns. Morgan received a ten-year loan worth $30 billion.
Once private enterprise comes to the realization that the government won’t let them fail, the free market is no longer free. The free market allows the freedom to succeed but also the freedom to fail.
September 7, 2008 marked the most extraordinary act of intervention into the market. Fannie Mae and Freddie Mac, owners of half the $12 trillion mortgage market, were taken over by the Federal Housing Finance Agency.
All these risky maneuvers were enacted on the behalf of taxpayers, yet homeowners are still the ones not to have been helped in any manner. The taxpayer can only lose with the end result being trillions of dollars tacked onto the national debt.
Fannie and Freddie should be left alone to file bankruptcy and liquidated along with their liabilities.
History shows us that government intervention, in an attempt to give the market an extra fix, will not work and may even delay the recovery period. Two prominent examples of this are President Roosevelt’s New Deal during the 1930’s and President Nixon’s wage and price controls during the 1970’s.
The Federal Reserve needs to reinstate its traditional lending standards. Even in a recession, the economy can resurrect its productive self, if only government would cut costs such as reducing military spending, balancing the budget and cutting taxes and regulations.
Privatizing profits and socializing losses are not the principles this country was founded on. Our addiction to easy money will send us towards another great depression unless we stop intervening now.
