Too Much Government, Not Too Little, Caused Great Recession

Just a generation after the collapse of the Soviet socialist system, a recent Pew poll reports that 49% of Americans 18-29 years old have a positive view of socialism, while only 46% have positive views of capitalism.

The ambivalence toward capitalism is due in part to the influence of the information and entertainment class — the mainstream media, Hollywood and the universities — whose biases are entrenched and well known.

Their portrayal of  the 2008 financial collapse and the shambles of its aftermath — as being caused by greedy Wall Street bankers who got rich by foisting deceptive loan underwriting practices on ordinary people — reinforces this narrative.

Now, another side of the story is crystallizing in the public mind due to serious investigative reporting. The latest new insights are from Jay Richards in his just-released book, “Infiltrated.”

What’s increasingly clear is that it wasn’t the free market, but rather Washington’s socialized housing policies and crony capitalism, that failed and brought on the worst recession since the Great Depression.

This other side of the story focuses on opportunistic financiers who exploited government policies to promote home ownership to the poor.

Dumbing down mortgage lending standards started in the 1980s with no borrower income documentation “liar loans” pioneered at Golden West Financial, founded by progressives Herb and Marion Sandler. The Sandlers would later donate millions from their lavish mortgage lending profits to Acorn, presumably to provide political cover while staying on the gravy train of exploiting the poor.

In 2006, just before the market turned, the Sandlers sold Golden West and its subprime portfolio to Wachovia Bank. This compounded Wachovia’s already impaired state and set the stage for a rescue and bailout by Wells Fargo two years later. This script also played out with Bank of America after it acquired Countrywide Financial.

But it was the federal government that set the grand stage for economic collapse. Two years before the meltdown of 2008, Washington intervention and political pressure on Fannie Mae and Freddie Mac resulted in their raising their subprime loan holding targets to 50% of their portfolios.

After the 2008 collapse there was a rush “to do something,” but the fact that no one went to jail was revealing. The legislative remedies were instead focused on the “transformation” that Barack Obama had promised.

With the White House and both chambers of Congress under Democratic control in 2009 and 2010, the stars were lined up.  So, rather than fixing what went wrong with actual reform bills that would reduce cronyism and harness the benefits of competition, Washington proceeded to give us ObamaCare and Dodd-Frank.

These new laws have moved the nation in a direction quite opposite to our heritage, saddling the private sector with new pervasive and granular regulations — creating heightened uncertainty, diminished lending and capital formation, and increased part-time over full-time employment.

The public sector, on the other hand, received a windfall from the new laws with legions of new, unaccountable bureaucrats, lobbyists, carve-outs and side-deals. In short, more cronyism.

Meanwhile, a new financial bubble has been creeping up, with President Obama calling the high cost of college tuition and student loan debt “a crisis.” What most probably don’t see is that Washington’s efforts to socialize education have done to tuition costs what they did to housing prices.

Washington’s ever-expanding government-guaranteed student loan programs have enabled colleges to ignore costs and raise tuition prices well above the (also government-induced) inflation rate.

The problem now is that, under the Obama economy, students can’t find jobs to let them pay back their loans after graduating. Forbes recently reported that “more than half of student loans are in deferral or delinquent.” Increasing defaults in the $1 trillion of student loans may well trigger the next financial crisis and bailout.

The other side of the story is vital because it explains how government intervention to promote and socialize access to housing and education has created two debt bubbles. The first ended in disaster — massive bailouts, trillion-dollar deficits and regulatory overreach that has piled sand into the gears of the private economy. We don’t yet know what the second will bring.

But coming so soon after the 2008 collapse from which the nation has yet to fully recover, this crisis may well arouse voters to connect the dots and make the 2014 midterm elections a referendum for smaller government and the repeal of bad laws that socialize rather than fix problems.

Powell is senior fellow at the Discovery Institute in Seattle.