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September 30, 2008

Thomas Sowell Makes the Mortgage Mess Simple

Genius is the ability to make the complex comprehensible. When things get confusing, I turn to Thomas Sowell. Here's how he sums up the financial crisis, and the lessons we should learn from it:

Since risky investments usually pay more than safer investments, the incentive is for a government-supported enterprise to take bigger risks, since they get more profit if the risks pay off and the taxpayers get stuck with the losses if not.
The government does not guarantee Fannie Mae or Freddie Mac, but the widespread assumption has been that the government would step in with a bailout to prevent chaos in financial markets.

There you have it: why the mortgage industry must not be nationalized, as a massive bail-out would accomplish, or quasi-nationalized, which is what led to this mess.

If Fannie Mae and Freddie Mac were free market institutions they could not have gotten away with their risky financial practices because no one would have bought their securities without the implicit assumption that the politicians would bail them out.

Just as "comprehensive immigration reform" will make a complete joke of America's territorial sovereignty by confirming that there will always be another amnesty, a bailout will make it clear that so long as the right bureaucrats have been paid off, only taxpayers are on the hook for bad loans.

Needless to say, Pelosi et al. have been trying to spin the exact opposite lesson, screeching that the solution to this latest government-induced disaster is still more State control.

On a tip from Wiggins.

Posted by Van Helsing at September 30, 2008 10:32 AM

Comments

Here's an excellent summary of the Fannie Mae situation from 2005, i.e., before the current blowup. Incidentally, it's written by Bethany McLean, who essentially blew the whistle on Enron a year before it went bankrupt.

Posted by: Jay Guevara at September 30, 2008 11:09 AM

I wonder why none of these Congresscriters have bothered to bring in Dr. Sowell as an adviser on this bill.

Posted by: Rick Lail at September 30, 2008 12:52 PM

"I wonder why none of these Congresscriters have bothered to bring in Dr. Sowell as an adviser on this bill."

Simply put, he's a black conservative-- a being loathed more than any other by the Left.

Posted by: Thulsa Doom at September 30, 2008 3:55 PM

God Bless Dr. Sowell. A brilliant man, we are very lucky to have him.

Posted by: Speedmaster at September 30, 2008 5:18 PM

Thomas Sowell is a very good economist and I highly recommend his books which also put a lot of economic speak into layman's terms.

Posted by: Ludwig Van Beethoven at September 30, 2008 5:24 PM