A Matter of Trust

November 11th, 2008 - by Quincy










3 Responses to “A Matter of Trust”

  1. Elise says:

    Well written. However, I wouldn’t place all the blame on Clinton. FDR created the Freddie/Fannie programs, and they were bound to fail eventually. Clinton just sped up the process.

  2. Quincy says:

    It’s true that Clinton didn’t start Fannie and Freddie, but the current financial crisis was triggered by the practice of offering subprime mortgages. The Clinton administration was instrumental in pushing Fannie and Freddie and other lenders to offer these subprime mortgages to individuals who couldn’t afford them. See http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260 and http://articles.latimes.com/1999/may/31/news/mn-42807

    When the housing market collapsed, and these individuals realized that they owed far more than their house was worth, they started defaulting on their loans. This is what caused the current financial crisis. In other words, as bad as Fannie and Freddie were, by forcing them to lower their standards and lend to people who didn’t qualify, Clinton directly contributed to the current crisis.

    For an explanation of why the subprime market collapse has such a catastrophic effect, see http://www.moneyweek.com/personal-finance/what-mortgage-backed-securities-mean-for-the-us-housing-market.aspx and http://en.wikipedia.org/wiki/Subprime_mortgage_crisis.

  3. Nathan says:

    Quince, nice post. So often the response to arguments for freedom is that such a position is coldhearted and cruel. Like you said, opponents of liberty mistakenly assume that the argument against the coercion and servitude of government programs and regulations is the equivalent of an argument for suffering and insecurity. To them, it’s government programs and regulation and having something done to alleviate society’s ills, or no government programs or regulations and having nothing done to alleviate society’s ills. Not only is that philosophy based on the misguided and dangerous belief that it is O.K. for us to determine that we can to wrong (e.g. confiscate wealth/steal, infringe on freedom) if we’re doing it for the “greater good” (e.g. reduce suffering, improve security), it also makes the false assumption that absent government intervention, nothing or less will be done to eliminate suffering. However, not only does history and reason show that this is not the case, it illustrates the exact opposite. Not only is there greater wealth and prosperity for the productive members of society through the efficiency of liberty and the free market, but the welfare of the incapacitated and dependent individuals within society also is much better provided for.

    Since I read you guys’ comments about the mortgage crisis, I figure I’ll add my two cents.

    While subprime definitely had a big part in the onset of the mortgage crisis, it was actually one component of a larger problem. The bubble was already rapidly being blown when interest rates were set excessively low (below the market rate) in the late 90s, then lower after the burst of the Nasdaq bubble (’00-01). These low interest rates made credit cheap, causing real estate to boom amid skyrocketing prices. But just like the stock market bubble preceding the Great Depression, when the fed became concerned and began to raise interest rates again, they popped the enormous bubble and moves to re-lower interest rates were unable to stop it from crashing down.

    So the current problems are symptoms of a fundamentally flawed monetary system, where central planners set the interest rate rather than the free market. This is exacerbated by government’s inevitably bad fiscal policy, which is enabled by the fed to feature virtually limitless spending.

    So while the subprime mortgages definitely contributed to the bubble and hastened its growth, it was actually a component of the larger fundamental problem–the federal reserve’s manipulation and dictation of interest rates.

    More information on this explanation can be found here: http://www.capmag.com/article.asp?ID=5353

    Ironically, before becoming chairman of the Federal Reserve, Alan Greenspan warned of the very effects his actions brought about:

    An elaboration on this view of the fed can be found here:

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