Government's Mistakes Have Deepened This Recession

Government's Mistakes Have Deepened This Recession. By Fred L. Smith, Jr.
Letter to the Editor in The Wall Street Journal
CEI, Apr 09, 2009

Steven Gjerstad and Vernon Smith suggest one unexplored aspect of our financial crisis: the role of egalitarian policies. To see this, note their distinction between the impacts of the $10 trillion loss in the 2000 stock market collapse and the $3 trillion loss of the recent housing collapse.

A driving force behind all this has been radical egalitarianism -- the idea that something that can be afforded by some should be made available to everyone. Our universal housing-ownership passion transformed the housing market. Under the egalitarian promotional housing policies of the last few decades (the Democrat's "affordable" housing goals; the Republican's "ownership society" obsession), banks became institutions that would loan you money even if you were unlikely to be able repay it. The moral hazard problems created by our bipartisan egalitarians (the Community Reinvestment Act, the mandates on Fannie Mae and Freddie Mac) enticed far too many Americans into purchasing homes priced beyond their means. There is a critical distinction between the democratizing tendency of the market and the coercive egalitarian policies of politics.

Many factors contributed to our financial crisis but as Messrs. Gjerstad and Smith suggest, we should add radical egalitarian policies to the list. As they note, these programs transformed the American Dream into the American Nightmare.

Fred L. Smith Jr. President Competitive Enterprise Institute Washington