We Can’t Spend Our Way Out of Trouble

The true failure of the current economic crisis lies with the government institutions attempting to regulate themselves out of the mess they’ve made of the economy. Too much government intervention in real estate markets—via Fannie Mae, Freddie Mac, CRA, and artificially low Federal Reserve interest rates—caused the boom-and-bust cycle. The Feds are now reaping the “benefits” of the subprime market they helped to create.

In the wake of the massive multi-billion-dollar bailout of the financial industry, many legislators and members of the media have incorrectly posited that the best way out of the subprime crisis is through a continued push for increased government regulation, subsidies, and interest rate manipulation of the money supply. They argue the current economic crisis is an example of the overall failure of the free market, when the reality of the situation is quite the opposite.

The twin bailouts of AIG serve as a prime example of how the government plans to solve the economic crisis: through massive subsidies and regulatory retrenchment. Bailouts are woefully ineffective at solving the root causes of the current crisis. They succeed only in propping-up failing companies at a heavy cost. Interestingly, it was the highly regulated real estate investments within companies like AIG that led to the current problems, while the less-regulated property and casualty insurance policies remain profitable.

The Feds would be wise to allow the market to run its course. It has a far better track record of success in maintaining a strong economy than any government agency.