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Government is Blaming Everyone for The Financial Collapse Except Themselves

May 2, 2010

Memo to Congress — Why Not Enforce the Laws and Regulations We Have Before Creating New Ones

By Peter Schiff

April 22, 2010 3:02 pm ET

In a speech to Wall Street today, President Obama talked of a “failure of responsibility” in Washington and on Wall Street. But the financial sector is the most regulated part of the economy, so surely responsibility lies mostly with Washington. It was the federal government that created deposit insurance, which removed risk (and therefore caution) from bank deposits. It was also the feds that created “too big to fail,” our new system of private profits and socialized losses. Most importantly, it was federal taxes and regulations that undermined our productive capacity, rendering us weak in the face of financial shocks.

In this speech castigating private greed, no mention was made of Fannie, Freddie, or the FHA’s role in encouraging sub-prime loans, nor of the Fed’s ultra-low interest rates which made the mortgage “teaser rate” possible. The maligned “unregulated derivatives” market was largely based on exposure to these government-backed loans.

Think about what the government did – it gave mortgages to people with no or little income which drove up the price of houses to where people and families with income were priced out of the market. Government should stick to defense, security, highways and national disasters and leave the market alone.

Obama claims he wants “common sense rules” to be put in place. Yet, his reform proposal defies common sense.

The new “resolution authority” is an attempt to replace the traditional bankruptcy court system with a bailout bureaucracy that subordinates the rule of law to political expediency. The result of this reform will be to increase uncertainty for any honest market participants – and create a protected sandbox for firms connected to the executive branch.

The “Volcker Rule” to split up large firms runs directly counter to this, and the past, Administration’s encouragement of dominant banks to buy their weaker competitors. Ironically, the additional regulations put in place by the bill will create tremendous barriers to entry for new firms, and strongly advantage those firms that can create the largest economies of scale (number of productive employees per compliance officer).

This is called regulatory capture.  Where businesses cannot compete on their own so they capture government to implement regulations to insulate them from competition.  This not only happens in the for-profit world, it happens more and more frequently in the non-for-profit world.   Where government and for -profit businesses finance special interest groups to lobby for regulation that benefits government officials, themselves and/or for-profit businesses.

So long as the Fed continues to hold interest rates artificially low and the government continues to guarantee mortgages, real estate prices will remain distorted, credit will be misallocated, moral hazards will increase, and the underlying fundamentals of our economy will continue to deteriorate. Contrary to the President’s assertion, government bailouts and stimulus have weakened the underpinnings of our economy, not saved it. As a result, the next economic crisis, likely to hit within a few short years, will be that much worse. Not only will this new regulation do nothing to prevent the second phase of the crisis, it will more than likely increase its severity.

The President seems to insinuate the he saw the crisis coming.

Given his solution to this whole crisis — not only did President Obama not see it coming, he’s setting the country up for an even bigger crisis.

Story – By:  Investment News

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