RALEIGH – In case there’s any Carolina Journal reader who hasn’t figured this out yet, I’ll state the matter plainly:
Judge politicians by what they do, not what they say.
For example, if a Democratic legislator or congressman bashes big business in the morning and then in the afternoon votes for big incentive packages or bailouts for big business, then don’t mark him down as a populist.
If a Republican legislator or congressman bashes big government in the morning and then votes in the afternoon for a massive new expansion of government spending or regulatory authority, then don’t mark him down as a conservative.
And if a policymaker of any stripe tells you in the morning that the Great Recession was caused by excessive borrowing, and then votes in the afternoon to perpetuate the government’s bias in favor of debt over savings, then don’t mark him down as a reformer.
During the past decade, households and businesses in America, Europe, and elsewhere took out escalating levels of debt to finance acquisitions and projects of dubious value. This wasn’t just a case of a few bad apples, or of “greed on Wall Street,” or the invention of esoteric financial instruments. This was the inevitable result of a series of public policies, enacted and implemented in multiple countries by politicians of varying ideological backgrounds, that juiced the money supply and encouraged leverage over equity, particularly with regard to real estate.
Tax, regulatory, and financial policies are all the blame. In the U.S., interest on many mortgage loans is deductible on the income tax. More broadly, equity is punitively taxed – with multiple layers of taxation on personal income from corporate business – while debt is deductible. Households and businesses respond to these incentives by borrowing more and saving less.
With regard to regulations, some agencies with a responsibility to police fraud and abuse did, indeed, fail to do their jobs – but more serious were the regulatory dictates on financial institutions to make increasingly shaky loans to increasingly marginal borrowers. Government officials came to see access to credit as a political matter rather than allowing lenders to assess and price risk accurately, whatever the implications for favored electoral constituencies.
And in financial policy, entities such as America’s Fannie Mae and Freddie Mac offered implicit government guarantees to loans that would otherwise have carried higher, risk-reflecting interest rates while the Federal Reserve and other central banks pumped excess money into the financial system. Both policies kept interest rates artificially low, thus inducing more debt than could be justified on the economic fundamentals.
Politicians who’ve been paying attention understand that these government policies contributed mightily to the boom that led to the current bust. But they won’t follow through with actions. Congress and the Obama administration have continued such shams as the Home Affordable Modification Program (HAMP), which has in most cases only delayed the inevitable foreclosures for households that simply can’t afford their current homes. These politicians also refuse to take the necessary first steps to phase out federal subsidies and guarantees to Fannie Mae and Freddie Mac.
Unless the political class is willing to proceed with such reforms, we’re just going to go through another boom-and-bust cycle. Politicians will yap. They will fulminate. They will promise and cajole.
And they’ll be full of it.
Hood is president of the John Locke Foundation.