Liberty and Tyranny (7 page)

EVENT 2: In 1992, the Department of Housing and Urban Development pressured two government-chartered corporations—known as Freddie Mac and Fannie Mae—to purchase (or “securitize”) large bundles of these loans for the conflicting purposes of diversifying the risk and making even more money available to banks to make further risky loans. Congress also passed the Federal Housing Enterprises Financial Safety and Soundness Act, eventually mandating that these companies buy 45 percent of all loans from people of low and moderate incomes.
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Consequently, a secondary market was created for these loans. And in 1995, the Treasury Department established the Community Development Financial Institutions Fund, which provided banks with tax dollars to encourage even more risky loans.

For the Statist, however, this still was not enough. Top congressional Democrats, including Representative Barney Frank (Massachusetts), Senator Christopher Dodd (Connecticut), and Senator Charles Schumer (New York), among others, repeatedly ignored warnings of pending disaster, insisting that they were overstated, and opposed efforts to force Freddie Mac and Fannie Mae to comply with usual business and oversight practices.
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And the top executives of these corporations, most of whom had worked in or with Democratic administrations, resisted reform while they were actively cooking the books in order to award themselves tens of millions of dollars in bonuses.
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EVENT 3: A by-product of this government intervention and social engineering was a financial instrument called the “derivative,” which turned the subprime mortgage market into a ticking time bomb that would magnify the housing bust by orders of magnitude. A derivative is a contract where one party sells the risk associated with the mortgage to another party in exchange for payments to that company based on the value of the mortgage. In some cases, investors who did not even make the loans would bet on whether the loans would be subject to default. Although imprecise, perhaps derivatives in this context can best be understood as a form of insurance. Derivatives allowed commercial and investment banks, individual companies, and private investors to further spread—and ultimately multiply—the risk associated with their mortgages. Certain financial and insurance institutions invested heavily in derivatives, such as American International Group (AIG).
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EVENT 4: The Federal Reserve Board’s role in the housing boom-and-bust cannot be overstated. The Pacific Research Institute’s Robert P. Murphy explains that “[the Federal Reserve] slashed interest rates repeatedly starting in January 2001, from 6.5 percent until they reached a low in June 2003 of 1.0 percent. (In nominal terms, this was the lowest the target rate had been in the entire data series maintained by the St. Louis Federal Reserve, going back to 1982)…. When the easy-money policy became too inflationary for comfort, the Fed (under [Alan] Greenspan and then new Chairman Ben Bernanke at the end) began a steady process of raising interest rates back up, from 1.0 percent in June 2004 to 5.25 percent in June 2006….”
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Therefore, when the Federal Reserve abandoned its role as steward of the monetary system and used interest rates to artificially and inappropriately manipulate the housing market, it interfered with normal market conditions and contributed to destabilizing the economy.

In 2008 and 2009, the federal government spent tax dollars at a frenzied pace to try to rescue the financial markets from its own mismanagement. Troubled Asset Relief Program (TARP) outlays could reach $1 trillion or 7 percent of the nation’s gross domestic product. TARP was originally enacted so the government could buy risky or nonperforming loans from financial institutions. But the mission changed within weeks—the government began using the funds to buy equity positions in financial institutions, presumably to inject cash directly into these entities. An oversight panel concluded that $350 billion of the TARP funds cannot be adequately accounted for.
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The Federal Reserve also provided assistance of $30 billion for Bear Stearns, $150 billion for AIG, $200 billion for Fannie Mae and Freddie Mac, $20 billion for Citigroup, $245 billion for the commercial paper market, and $540 billion for the money markets.
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It is poised to lend over
$7 trillion
to financial institutions, or over half the size of the entire American economy in 2007.
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According to Bianco Research president James Bianco, the federal bailout far exceeds nine of the costliest events in American history combined:

The entire cost of World War II to the United States was $288 billion, or $3.6 trillion when adjusted for inflation.
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Congress also passed, and President George W. Bush signed, fiscal spending bills to try to alleviate the economy’s ills, such as the $152 billion Economic Stimulus Act of 2008
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and the $300 billion Housing and Economic Recovery Act of 2008.
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Congress and President Barack Obama are upping the ante by hundreds of billions more or so with the so-called American Recovery and Reinvestment Plan of 2009.
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The
Wall Street Journal
reports that when stimulus and bailout spending is combined, “the federal spending share of GDP will climb to 27.5%.” Put another way, more than $1 of every $4 produced by the economy will be consumed or controlled by the federal government. The
Journal
also notes that “all of this is fast pushing the U.S. to European spending levels, and that’s before Obama’s new health-care entitlements.”
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The crisis created in the financial markets is of the Statist’s making. But he learns nothing from the destruction he unleashes, for he is not motivated by virtue and he does not act with prudence. Instead, his framework is ideological. As President Obama’s chief of staff, Rahm Emanuel, openly admitted, “Rule one: Never allow a crisis to go to waste. They are opportunities to do big things.”
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By wrestling decision making from the free market, the Statist is able to exercise enormous control over the individual and society generally.

The oil industry is a favorite target of the Statist, since fuel runs the engine of America’s vast economy. The Statist knows that the consumer is particularly sensitive to increases in gasoline prices because of his frequent visits to the gas station. The Statist tells him that these increases are due to “greed,” “profiteering,” and “price gouging” by the oil companies. Of course, oil is a commodity in worldwide demand, with use in China and India, the earth’s most populous nations, growing rapidly. Approximately 70 percent of the price of a gallon of gasoline is the cost of crude oil.
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Therefore, supply and demand on the world market directly influence availability and pricing in the United States.

But apart from the world market, the Statist will never and must never concede that
he
is sabotaging the provision of affordable, reliable, domestic supplies of energy by significantly and purposefully driving up costs to the oil companies in addition to worldwide supply and price influences. The Statist’s heavy hand has gripped the oil industry for more than one hundred years. The oil industry is hardly free to operate as efficiently as it could or to be as responsive to consumer demands as it would like. It has become, in essence, a quasi-state-run enterprise, because it cannot drill, transport, refine, and store fuel without receiving government permission, complying with government regulations, and paying taxes at every level of production.

When the Statist prevents the oil companies from drilling new wells in places such as Alaska, the Great Lakes, and most coastal areas, he is driving down the supply of domestic crude oil and gasoline. How can a nation cut itself off from most of its energy resources and hope to prosper or, in the long run, even survive?

Moreover, America’s refining capacity has not changed much over the last thirty years. As
Investor’s Business Daily
reported in March 2008, no new refinery has been built in the United States since 1983. “In 1982, the U.S. economy was served by 301 refineries. By 2007, the number had dwindled to 149. Productivity has kept output steady over the years at 17 million barrels a day. But the U.S. economy has grown by 125%.”
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The Statist has created a myriad of regulations that dictate a long list of gasoline “blends” as well as seasonal and regional variants that create costly complexities and inefficiencies in the domestic production of usable fuel products. Expanding existing refineries or building new plants must meet newer and more onerous regulations than those applicable to older refineries.
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These are all hidden, government-imposed surcharges that are magnified throughout the economy and, in the end, are borne by the consumer.

The Statist deflects public scorn for the consequences of his own central planning by blaming the very industry he is sabotaging for supply dislocations and price hikes. He conducts aggressive public relations campaigns that consist of congressional show trials where oil executives are forced to appear before committees and television cameras and defend their business activities in testimony given under the penalty of perjury—as if they may have committed some crime. To underscore this perception, the Statist regularly calls for federal investigations of the oil industry, alleging “collusion,” “monopolistic practices,” or other illegal conspiracies. Invariably, the investigations clear rather than indict these businesses.

And what of those oil industry profits? Much reporting on oil company revenues, with headlines shouting “oil companies made record profits,” is sophomoric and misleading. Rather than serving as watchdogs of the government, too many in the media give voice to the most demagogic statists. In 2007, the oil companies earned between eight and nine cents for every dollar of gasoline sales.
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Again,
Investor’s Business Daily
recently summed up the oil industry profit situation this way:

Government, not the oil industry, is the biggest “profiteer” from oil. And it uses the tax revenue to expand its own authority at the expense of the individual, as it does with an endless number of other industries—including electric power, coal, lumber, pharmaceuticals, automobiles, aircraft, and agriculture. The Statist’s intrusion in the free market is boundless.

However, it should be emphasized that the Conservative is not a corporatist—that is, he is not a special pleader for oil companies or any other corporations. He defends free markets because he defends the civil society and the Constitution’s limitations on federal authority against the tyranny that threatens them. Therefore, the Conservative also opposes
crony capitalism
, where the Statist uses the power of government—often at the behest of a given industry or corporation—to subsidize one favored enterprise at the expense of another. The Statist’s purpose, as always, is to extend his own reach.

For example, ethanol has been around since the 1800s. If it were a viable alternative or additive to gasoline, which supposedly would reduce oil use, gasoline prices, and automobile emissions, the free market would have responded positively. But the consumer and the producer were not all that interested. Of course, that did not dissuade the Statist. For years, large agricultural corporations and environmental groups have lobbied the federal government to promote ethanol production and use. Having already severely damaged the supply of domestic oil, the Statist responded to the lobbying efforts by using tax dollars to heavily subsidize ethanol production, imposing tariffs on the importation of ethanol, forcing the automobile industry to build more ethanol-friendly vehicles, and setting mandates on domestic ethanol production and use levels—15 percent of American cars are to run on ethanol by 2017.
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