Originally posted at Red Virginia:
Many conservatives have came to me and asked me, “What should we do about the sub-prime mortgage crisis?” Most conservatives believe that government intervention is bad but most do not understand why. Many believe that is is the banks that are the problem.
To understand this problem deeper lets take a look at the problem. The problem has been that consumers have been having a higher than normal default rate on their current homes. The interest rates were low and now they are high. This is not the banks problem.
The Federal Reserve believes lower the interest rate again is the solution along with buying out the big banks. It has been even reported that the Fed is looking at buying out more major banks like places like Norway, Sweden, and Finland did many years before.
Any conservatives intuition would be that this is a bad idea. They are correct, this is the worst idea. The Fed and President Bush are looking at expanding the power of the Fed. They would over see everything in the financial market from investment banking, commercial banking, insurance companies, etc.
The positives is that, in industries that are already highly regulated, it puts them under one roof. The problem with this is that with this current crisis there will be a call for more regulation. Since the Fed is semi-independent this could lead the government to make it less independent.
The negative is if the above happens the economy will be planned by career politicians. Studies have shown that the less the independent central bank the more inflation.
To make a long story short, what we need is less government control not more. I believe the Fed is the reason why we are in the crisis today and to put more power into their hands is like giving a murderer an AK-47. Remember when the interest rate is lowered by the Fed people move their money to other areas. That will increase their investments in those areas, this case housing. The bust period is when the over-investment is corrected by the market.
The Fed caused the over-investment. It allowed banks to take more risk and to bail them out will only encourage more.
What we need, as conservatives, is to support a plan of deregulation. We need to allow banks and consumers to take on more of the risk, not the tax-payers. This is like if you were to buy a used car and it broke down. You would go to the dealership and see if it had a warranty before you bought it. If it does, the risk is on the dealer for that fixed time. If it doesn’t, you bear the risk. And you shouldn’t expect the Fed government to bail you out if they did you would buy a used car without hardly looking at it.
I would even go to far as to say abolish the Fed and allow the market to set the interest rate, not the Fed.