Small Victories

October 20, 2008

Among libertarians, there is a good deal of concern that we “control the narrative” about this recession, pointing out that it isn’t “the free market” that has failed, but rather crony capitalism. Where Democrats have their “Swift Boating,” libertarians recall the prevailing narrative about the Great Depression, and say “Never again.” Generally, however, such sentiment is restricted to already-libertarian blogs and magazines. Thus was I elated to read a particular editorial in today’s Washington Post, “Is Capitalism Dead?

Fannie Mae and Freddie Mac…were allowed to engage in profitable but increasingly risky activities with an implicit government guarantee. The result was that taxpayers had to assume more than $5 trillion of their obligations. Contrast U.S. experience with that of Canada, where there is no mortgage interest deduction and the law requires insurance on any mortgage over 80 percent of a home’s purchase price. Delinquency rates at Canada’s seven largest banks are near historic lows.

Sure, I’ll believe the story that nobody was accounting for the fact that home prices can sometimes fall, which led them to take on more risk than they realized. But a government guarantee undercuts the basis of the free market, that you will actually have to live with the consequences of your actions. “Moral hazard” is not just a buzzword; it’s the difference between the free market and crony capitalism.

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