Too many people in this country and elsewhere are making a Bad Deal with their government. Perhaps Americans have been slower to make the Bad Deal, because our nation was founded, and refounded with each new wave of immigrants, by people who were fleeing the Bad Deal in their own countries. The Bad Deal is, we surrender part of our freedom to our government in exchange for a promise that the government will remove from us some of the risks of our bad decisions.
Businessmen make good and bad decisions. With the good decisions, they provide a very popular good or service in exchange for which they make a lot of money. With the bad decisions, people either do not want the good or service or they can find it somewhere else cheaper. The businessman makes less money or may even go broke and lose his investment.
In most countries, that is considered too chaotic and disorganized. That is particularly so when it comes to big businesses. Even where such countries will let small businesses fail, they keep the big businesses propped up.
With the loss of the risk of failure, the benefits of successful risk taking grow anemic. The folks in the government providing the protection from failure demand a piece of the action. In the more clumsily corrupt countries, government officials take bribes or are directly invested in the protected business. In the more sophisticated countries, the process of “sharing” in the prosperity of the protected business is more camouflaged. There are special taxes and fees paid to the government, or the business is guided by the government into activities that benefit the current government leadership and its friends.
The housing loan giants, Fannie Mae and Freddie Mac, are examples of that in our country. They were created by Congress and given special privileges that stifled competition and lowered their costs, allowing their businesses to expand until they became two of the largest companies in the United States. Investors lent them an unending supply of money at very low interest rates on the assumption that the government would never let the companies fail. In exchange, Fannie and Freddie had very elaborate programs for making Congressmen and Senators look good in their districts, with fancy press conferences where Fannie or Freddie officials bragged about all the mortgages supported in the district and how important the Congressman or Senator had been to Fannie’s or Freddie’s success.
Fannie Mae and Freddie Mac gave up significant freedom of decision in their business plans in order to get the government protection. Their experience, though, demonstrates a central problem of the Bad Deal: while the government promises to protect us from consequences of our bad decisions, it does not protect us from bad decisions by government. At last the Fannie Mae and Freddie Mac house of cards tumbled down. It happened when the bad decisions urged on them by their government “friends” left the firms powerless to withstand the swirling winds from the air escaping out of the housing balloon. Fannie and Freddie helped puff up the balloon under government guidance together with other failed government programs. The firms failed, and the government had to take the companies over entirely.
Now the Obama Administration is offering to take over the consumer’s job of making his own financial decisions. They propose a new consumer regulator to stand in the consumer’s place, with the assignment to design all of the financial products that banks and other firms must offer to their customers. Normally customers and financial companies have figured this out among themselves in the market place. The Administration calls these new products (to be designed by a five-man board in Washington) “plain vanilla” products. The Obama Administration believes that simple is better. If you do not want plain vanilla, if you need a loan or a checking account or a savings account or a credit card with some extra features, good luck, because the new agency will be poised to pounce on any financial firm that dares offer it to you. It reminds me of the old Model T Ford. You could get it in any color you wanted, as long as the color was black. Thank goodness Chevrolet came along and offered blue, or we would never have had Mustangs.
Which again is the point: when government makes the decisions, there is little incentive for things to get better. In promising to eliminate your risk, the government does not want to risk some innovation going wrong.
Sure, businesses and consumers making their own decisions make mistakes. Then they learn from their mistakes, pick themselves up, and try again and usually do better. But Fannie Mae, Freddie Mac, the recent financial panic and the coming rise in interest rates and inflation, are a few near-term reminders of how government can make mistakes, real whoppers. Long experience over the centuries has shown that mistakes by the government are the bigger risk. When we accept the Bad Deal and surrender our freedom of action to the government, who will protect us from the government’s mistakes?
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