SPECIAL REPORT: The sky really is falling (but it need not)
16 October 2008
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By Jonathan W. Emord
With the financial sector in disarray and several major institutions either going belly up or becoming assumed by others, credit markets are drying up and loans for everything from automobiles to homes are becoming scarce. The solution offered by almost all those in government (with the notable exception of Ron Paul) is, of course, more government.
The $700 billion bailout idea brings with it a parade of “horribles” for all Americans. Moreover, $700 billion is this year’s price tag for a bailout but the crisis is likely to linger on for a generation and the road ahead is almost certainly going to involve $1 trillion plus in payments annually to keep the precarious financial institutions afloat. It will also involve a heavy dose of new federal regulation, transforming the financial sector into something resembling Medicare. There will be more extensive regional regulatory controls, with federal authorities holding a direct veto over every lending decision.
The knee jerk reaction in Washington is always to throw money and regulation at the problem. It is regulation that in fact got us into this mess. Financial institutions are generally conservative creatures and the mortgage crisis arose because of federal inducements to make mortgages more available to those who really lacked the financial wherewithal to support mortgages. The consequence is a burst of the bubble with resulting destruction of many companies that overextended themselves.
When government finances failing industries to keep them afloat, we all suffer. The cost of the losses for one are magnified and spread to all, resulting in inflation, reduction in new market entry, and retention of those with poor judgment. The better solution is to go in the opposite direction. We should declare a five-year moratorium on federal taxes of the financial sector, thereby inducing investors to delve into finance markets and prop up the banks rather than flee from them. We should eliminate anti-trust regulations that prevent rapid mergers of financial institutions so the more stable institutions, including those outside the financial sector, can gobble up the less stable. And, yes, we should let those that cannot survive go belly-up.
Good idea will be ignored
The result of this deregulatory approach would be a restoration of money markets without need for direct government intervention and without need for imposing on the American people an inflationary tax created by a massive government bailout. Few in Washington will offer a solution of this kind because it means they lose power rather than gain it. Few in Washington appreciate free markets because their power, influence, and personal financial futures depend upon the perception that they can solve the world’s problems when, in fact, they usually make those problems far worse.
Adding a trillion a year to federal spending atop massive war payments ensures a return to inflation. The loss of lending will mean that small businesses will die at higher rates, individuals will be forced out of purchases for large consumer goods, automobiles, and homes, leading to unemployment in all sectors that manufacture those products. The result will be a cascading set of losses that recreate elements of the Great Depression.
The ingenuity of the American people is boundless, if only left without government constraints. The present crisis is one of funding, yet there are many in America with extraordinary wealth who would bring that wealth into these markets if a financial incentive existed for the investment. That financial incentive is readily available. The same approach Jack Kemp used as HUD Secretary can be used here with equally beneficial effects. Embracing the financial sector in a federal tax-free zone would make investment into it extremely attractive. Combining that with an elimination of anti-trust law restrictions against consolidation would permit the bigger, stronger fish to gobble up the weaker and would enable the stream of commerce to go on swimmingly.
Thomas Jefferson said it best when he reminded the people of the fledgling republic, “… a wise and frugal government … shall restrain men from injuring one another, … shall leave them otherwise free to regulate their … pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government.”
Jonathan W. Emord is a principal in the Washington, D.C. law firm Emord & Associates, P.C. (www.emord.com). He has defeated the FDA more times in federal court than any other lawyer in American history (five times, four on First Amendment grounds). He represents over 400 sellers of dietary supplements, including MLM companies. Emord is the host of “Health Law and Politics” on the TalkStarRadio Network. Listen live on the Web (www.talkstarradio.com) Saturdays at 4:00 p.m. Eastern; Sundays at 2:00 p.m. Eastern. Emord is the author of the critically acclaimed, Freedom, Technology and the First Amendment (1991) and the recently released The Ultimate Price (2007) (available from Sentinel Press (202-466-6937).
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