Lehman Brothers and the Government, pt 2

September 19, 2008 at 12:29 pm 1 comment

These concerns have been around a long time. The government was legalized to act the way they did in Wall Street this week through a clause in the Federal Reserve Act.

And in 1934, Representative C.L. Beedy argued against this clause, saying “[the Federal Reserve Banks] ought never, in my opinion, be put into the lending business. It is a perversion of the original purpose for which those banks were established.”

But the government has become involved in the lending business, and it has tangled itself up in the Wall Street mess. So the question remains: how is this going to affect us, now and in the future?

One possibility is worse economic tangles in the future. Because the government sponsored Fannie Mae and Freddie Mac, those giants who bought mortgages from banks, banks loaned money for risky mortgages that could never be paid. They knew the governmental treasury was standing right behind them in case something happened. And a lot happened: the risk piled up, the payments didn’t come in, Fannie Mae and Freddie Mac crumbled because they’d bought so many worthless mortgages, and the government bailed them out. What happens when firms come to expect the government to bail them out? They’ll take on more and more risk, because they get the gains if it pays off but are protected from the injury if they lose. And if the government keeps piling up the debt and helping out such firms, the money has to come from somewhere. Want to guess? It’ll probably come from tax dollars, which means we’ll be paying to bail the companies out of their greedy gambles.

The companies won’t be as savvy as they would have to be if they would absorb the loss. They’ll take on extra risk, confident of the government’s help should something go wrong. And if the government instead gives them the Lehman Brothers treatment, the economy is left with a much bigger mess to clean up. But if the government keeps stepping in and regulating businesses, it can make an even worse problem. The more the government interferes with free market trading, the more it runs the risk of picking up some regulating habits from the socialist economies – systems that have been proven to not work, while the free market always has.

Please note that I’m not calling anyone or any facet of the government Communistic at all. I’m just pointing out that capitalism and socialism are at the two opposite ends of the chart, and the more the government regulates the more they move towards the wrong end. The effect of these events might be more economic turmoil down the road.


Entry filed under: Economics.

Lehman Brothers and the Government

1 Comment Add your own

  • 1. freedom1  |  September 22, 2008 at 5:35 pm

    Well said. I hope Secretary Paulson is a regular reader of Overlapped!


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