(Guest Post by Matthew Ladner)
I will never forget where I was when I heard him say it: I was driving through a high-desert forest near Prescott Arizona. The nation was in the midst of a full financial meltdown. I had the radio on, and one of the Sunday Morning Talk shows playing, Face the Nation if I recall correctly. That’s when I heard Representative Barney Frank, Chairman of the House Financial Services committee state without the slightest hint of shame:
The private sector got us into this mess. The government has to get us out of it.
I nearly ran my vehicle into a tree.
I could pain you dear readers with a blow by blow of just how completely culpable federal policy in general and Mr. Franks in particular were in the meltdown. Others however have performed that task. A delightfully short summary however was to be found in the comments section of a Vanity Fair article by Joseph Stiglitz. Dr. Stiglitz had written a long article for the magazine whose purpose was to absolve Freddie and Fannie and other elements of federal housing policy from blame for the financial crisis. One comment put the matter succinctly:
Let me get this straight: the creation of the sub-prime mortgage market had nothing to do with the sub-prime mortgage financial meltdown?
Now don’t get me wrong- there are private sector villains in this sordid tale (did for instance the credit rating agencies sign a pact with the Devil to survive what ought to have surely been a death-blow to their credibility?) but these private actors respond predictably to bad incentives created by federal policy. A few decades of nudging banks in the direction of making dodgy loans coupled with creating entities dedicated to buying them up eventually turned ya-hoo mortgage brokers into funny money printers. Can anyone truly be shocked that people making huge fees off absurd loans that they could quickly offload onto someone else’s balance sheet failed to resist the temptation to do so?
It would be delightful if the federal government could distort the mortgage market for decades in the interest of creating a more just society without creating unintended consequences. It would also be delightful if we could bottle the tears of unicorns as a cure for cancer, depression and baldness. The law of unintended consequences is a terribly powerful force. The beginning of policy wisdom is to fear its awful power. Central planners tend to assume rational technocratic adjustments being made to policies and seem shocked, shocked when they wake up and find that pesky politics has taken over.
The “Break in Case of Emergency” glass box in Congressman Franks mind contained a piece of paper that read “If it hits the fan, pretend the government had nothing to do with it and call for more government.” That makes him worthy of a Higgy in my estimation.