In his December 10, 2009 Fact and Comment column, In-Credit-Able, in Forbes Magazine, Steve Forbes clearly communicated several points worth capturing. Here’s on on the mortgage crisis:
Government-sponsored enterprises Fannie Mae ( FNM – news – people ) and Freddie Mac ( FRE – news – people), with their implicit government guarantees, were able to totally dominate the mortgage market. They could borrow cheaply and leverage up on a scale no private company could. When they went bingeing on subprime mortgages, they ended up twisting and then destroying the housing market. The private sector was quite capable of generating players that could have performed Fannie’s and Freddie’s roles. And because they wouldn’t have had Uncle Sam’s moral-hazard safety net, they would have been infinitely more cautious, even with the Fed creating floods of liquidity and the credit rating agencies forgetting their raison d’être. Yet Congress is determined to keep these beasts alive and under government sway. Washington is also taking over the student loan market.
This is not a well understood point. Having the implicit guarantee of the government short-circuited the prudence that would take place in a free market. All the bright bulbs that condemn free markets for causing the crisis, don’t seem very bright to me because they not only miss the true cause of the crisis, but they blame the very thing that could have prevented it. Removing prudence from a free market through a government action will always end badly.
Here’s some clear thinking from Steve on health care:
The prospective government de facto takeover of health care will extend Washington’s reach into the credit markets. Health insurers will be reduced to federal vassals by being forced to offer policies at prices and terms dictated by Washington. As a reward they will have first call on the credit markets, with the same sort of implicit guarantees that once so benefited Fannie and Freddie.
It’s easy to forget, businesses like insurance companies are in business to make a profit for their shareholders. If they don’t make a profit, there’s nothing forcing them to stay in business.