All Commentary
Thursday, May 21, 2009

Who Watches Our Guardians?

Sweep aside the phony “outrage” over nationalized AIG’s $165 million in bonuses and ask yourself this: Who gave the company the money? When politicians dole out other people’s money to business, they have no right to complain about the results—especially since the bonuses were allowed under the law passed by Congress.

As Adam Smith wrote in The Wealth of Nations

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick. . . . It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.

You’ll find no sympathy for AIG here, but let’s have no more sanctimonious pronouncements from the facilitators on Capitol Hill.

Our “leaders” say the insurance behemoth had to be saved lest another Dark Age descend on the world. When have they been right before? Other firms would have salvaged the profitable parts of the company. As for AIG’s counterparties in mortgage-related credit default swaps, they could better weather any storm from a bankruptcy if they weren’t hogtied by arbitrary capital requirements imposed by unaccountable government authorities who can’t possibly know the nuanced particulars of time and place.

On the other hand, have the bailout proponents tried calculating the consequences of the AIG rescue in terms of moral hazard? Will future counterparties exercise more or less diligence in light of this episode? 

Predictably, the leading inquisitors into the causes of the financial turmoil are themselves among the most culpable: Rep. Barney Frank, Sen. Chris Dodd, and New York Attorney General Andrew Cuomo. AIG got into trouble because it in effect wrote insurance policies (credit default swaps) against the failure of securities based on mortgages, many of which were waiting to blow up when the housing bubble burst. Who created the housing bubble?

It may be hard to tell from the news coverage, but the central government deserves the lion’s share of the blame, particularly for its government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which bought up and securitized a slew of bad mortgage loans, thereby encouraging lenders to write more of them. 

Enter Frank, Dodd, and Cuomo. There were no bigger boosters of Fannie and Freddie in Congress than Frank and Dodd. (The GSEs were vigorous lobbyists and generous campaign donors.) Every time someone questioned the GSEs’ fiscal integrity, these guys jumped in and assured us that everything was fine. 

And then there’s Cuomo, Bill Clinton’s last secretary of housing and urban development (HUD) and close friend of the Mortgage Bankers Association, which likes any policy that makes writing mortgages safer—for its members. According to the Village Voice in 2008, Cuomo pushed the GSEs to buy more and more dubious mortgages, while requiring them to report less and less. “In other words,” Wayne Barrett writes, “HUD wanted Fannie and Freddie to buy risky loans, but the department didn’t want to hear just how risky they were.” Cuomo also took steps “to reshape the Federal Housing Administration (FHA), which guarantees millions of mortgages. These actions, too, sought to maximize homeownership—this time by opening the FHA’s door to borrowers unable to qualify in the past, a lofty goal that has also helped spur an FHA delinquency rate that exceeds its subprime competitors. . . . Cuomo even supported down-payment and closing-cost assistance programs that allowed FHA borrowers to buy a home without spending a cent of their own money up front.” (If you want to appreciate what a sewer Washington is, read Barrett’s article.)

Are these guys pursuing AIG out of guilty consciences? Political opportunism is more likely. Will they ever have their day in the hot seat? Not likely. That’s how government works.


* * *


The change in administrations has brought no change in plans to build a fence along the southern border. Too bad, for reasons Becky Akers explains.

The budget deficit has exploded, but contrary to popular opinion, it doesn’t mean we’re spending the wealth of future generations. Roy Cordato tells why.

It’s nearly unanimous. Commentators on the left and right agree that World War II ended the Great Depression. Art Carden says they are wrong. 

Some say deregulation wrecked the economy, while others say regulation is the culprit. Both have a point, according to Sanford Ikeda. And speaking of regulations, James Payne has a few words for those who think just a few more will do the trick.

High gasoline prices once were used to justify land-use controls. Now that prices have fallen, the controllers need a new reason. Steven Greenhut shows they have had no problem finding one.

We like to think that economists make predictions in good faith on the basis of sound information. Anthony de Jasay suggests they could just be making bold career moves.

How often do “experts” say America needs more college graduates? George Leef politely responds that they don’t know what they are talking about.

Here’s what our columnists serve up: Lawrence Reed discusses the effort to make state government more transparent. Donald Boudreaux explains what’s wrong with Keynes. Stephen Davies says beware fortune tellers and planners. John Stossel notes how easy it is for government to create jobs. David Henderson answers the “government fundamentalists.” And Robert Murphy, reading the latest charge that oil prices are rigged, responds, “It Just Ain’t So!”

Books coming under examination discuss global warming, irrationality, labor, and liberty.

In Capital Letters, Mark Skousen skirmishes with David Henderson and Jeffrey Hummel over the Greenspan Fed.

Sheldon Richman
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  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.