Bailout Will Only Worsen Federally Caused Crisis

On the second try in a week, the $700 billion bailout (“rescue”) bill (“The Emergency Economic Stabilization Act of 2008”) was easily stampeded through the House with a vote of 263 to 171, despite public opposition. The measure strongly and eerily resembles the Reconstruction Finance Corporation (RFC), which as Independent Institute Senior Fellow Robert Higgs has shown in his book, Depression, War and Cold War, was modeled after the corporatist War Finance Corporation of World War I. The RFC was created in 1932 by President Herbert Hoover and then expanded by Franklin Roosevelt in an attempt to bail out and prop up insolvent, politically connected banks, railroads and other firms whose malinvestments resulted from the Federal Reserve’s financial bubble of the late 1920s. According to Hoover, “We used such emergency powers to win the war; we can use them to fight the depression.” FDR similarly stated that in describing the financial panic as “a crisis in our national life comparable to war,” he would seek “broad executive power to wage a war against the emergency as great as the power that would be given me if we were in fact invaded by a foreign foe.”

However, as Dr. Higgs documents, instead of being a “rescue” plan, the RFC was a major factor in deepening and prolonging the Great Depression and fomenting and protecting industrial cartelization. Unfortunately, the myth of the New Deal and the need for federal dominance over the economy persists in American political culture and has been used to rationalize the new Paulson/Bush/Pelosi/Frank/Dodd/McCain/Obama bailout—the single largest redistribution of wealth in history from the general public to politically connected business interests. And all of this while commercial and consumer credit shows no sign of a crisis.

All it apparently took to persuade a sufficient number of House members to change their earlier vote was a barrel of earmarks (tax and subsidy provisions) plus a meaningless increase in the level of bank savings “insured” by the federal government to $250,000 from $100,000. Yet, no sooner did the bailout bill pass and Bush quickly signed it, the Dow Jones Industrial Average ended down 150 points.

Meanwhile, none of the causes of the subprime mortgage meltdown itself have been addressed. Instead, many politicians and pundits have incredibly blamed the “free market” as if government was not the dominant influence in American banking and finance today. However now in the new Independent Policy Report, Anatomy of a Train Wreck: Causes of the Mortgage Meltdown, Research Fellow Stan Liebowitz sets the record straight by showing how and why the federal government-dominated housing and regulatory establishment is responsible for creating the financial crisis starting in the early 1990s, in a misguided, politically-motivated attempt to increase home ownership. As Dr. Liebowitz notes:

[T]he tool chosen to achieve this goal was one that endangered the entire mortgage enterprise: intentional weakening of the traditional mortgage lending standards. . . . and the decline in mortgage underwriting standards was universally praised as an ‘innovation’ in mortgage lending.

For further information, please see the news release for Anatomy of a Train Wreck as well the cover story based on it in the new issue (October 20, 2008) of National Review (subscription required). This very timely and far-reaching Independent Policy Report is also included in the Independent Institute’s forthcoming book, Housing America: Building Out a Crisis, edited by Randall G. Holcombe and Benjamin W. Powell.

David J. Theroux is Founder, President and Chief Executive Officer of the Independent Institute.
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