The Right Opinion

Our Government-Created Financial Crisis

By Walter E. Williams · Dec. 12, 2012

Suppose you saw a building on fire. Would you seek counsel from the arsonist who set it ablaze for advice on how to put it out? You say, “Williams, you'd have to be a lunatic to do that!” But that's precisely what we've done: turned to the people who created our fiscal crisis to fix it. I have never read a better account of our doing just that than in John A. Allison's new book, “The Financial Crisis and the Free Market Cure.”

Allison is the former CEO of Branch Banking and Trust, the nation's 10th largest bank. He assembles evidence that shows that our financial crisis, followed by the Great Recession, was caused by Congress, the Federal Reserve, Freddie Mac and Fannie Mae and was helped along by the Bill Clinton, George W. Bush and Barack Obama White Houses.

The Federal Reserve, under the chairmanship of Alan Greenspan, created the massive housing bubble by over-expanding the money supply. President Bush and members of Congress, through the Community Reinvestment Act, intimidated banks and other financial institutions into making home loans to people ineligible for loans under traditional lending criteria. They became subprime lenders. Lending institutions made these loans, now often demeaned as predator loans, because they knew they'd be sold to government-sponsored enterprises (GSEs) Freddie and Fannie.

The GSEs had no problem taking this risky path, because they knew that Congress would force taxpayers to bail them out. Current Fed Chairman Ben Bernanke is following in the footsteps of his predecessor by massively expanding the money supply by purchasing Treasury debt. He is creating prime conditions for a calamity by the end of this decade.

Then there were the crony capitalists, among whom are Goldman Sachs, Citigroup, Countrywide, Bear Stearns, JPMorgan Chase, General Motors and Chrysler. These and many other companies, through the thousands of Washington lobbyists they hire, are able to get Congress to shortcut market forces. Free market capitalism is unforgiving. In order to earn a profit and stay in business, producers must please customers and wisely use resources to do so. If they fail to do this, they face losses or go bankrupt.

It's this market discipline of profits and losses that many businesses seek to avoid. That's why they descend upon Washington calling for government bailouts, subsidies and special privileges. Many businessmen wish not to be held strictly accountable to consumers and stockholders, who hold little sympathy for economic blunders and will give them the ax on a moment's notice. With a campaign contribution here and a gift there, they get Congress and the White House to act against the best interests of consumers and investors. Allison suggests that if our country had a separation of “business and state” as it does a separation of “church and state,” crony capitalism or crony socialism could not exist.

Allison says that crony capitalism should not be our only concern. The foundation for economic collapse 20 to 25 years from now has already been set. Social Security and Medicare deficits, unfunded state and local pension liabilities, government operating deficits, baby boomer retirement and a failed K-12 education system have eaten out our substance.

What I take away from Allison's highly readable book is that our biggest problem lies in the Federal Reserve's ability to manipulate our monetary system to accommodate big government and use inflation to rob Americans. That's why politicians and government leaders everywhere hate a monetary system based on gold. They can manipulate the quantity of paper money, but they can't manipulate the quantity of gold.

Here's a tidbit of information about John Allison, now president of the Washington-based Cato Institute, that speaks to this man's morality as BB&T's CEO, which can't be praised highly enough. His company refused to lend money to developers who acquired land by having the government take it from private owners, euphemistically called eminent domain. That's putting his money where his mouth is, not sacrificing principle for the sake of earnings.



Tod in Brooklyn, NY said:

Ok, Mr. Williams---It is time for my "brood of vipers" list of beaurokrats: Chris Dodd, Barney Fwank, Ben Bernanke, Larry Sommers, David Axelrod, Valerie Jarrett, Antcy Piglousy, Leon Panhandler, Billy 'blow 'em up' Ayers, da rev Jeremiah Wrong, Katleeeeeeeeeeeeen Sebelius, ah shucks, folks there just ain;t nuf room here! Get them cells at club Gitmo now!!

Wednesday, December 12, 2012 at 6:14 AM

Tod in Brooklyn, NY said:

Ok, Mr. Williams---It is time for my "brood of vipers" list of beaurokrats: Chris Dodd, Barney Fwank, Ben Bernanke, Larry Sommers, David Axelrod, Valerie Jarrett, Antcy Piglousy, Leon Panhandler, Billy 'blow 'em up' Ayers, da rev Jeremiah Wrong, Katleeeeeeeeeeeeen Sebelius, ah shucks, folks there just ain;t nuf room here! Get them cells at club Gitmo now!! The free market Capitalist utilizes wisdom, savvy principles, and fossil fuels to prosper. Invest your own capital, at risk, to make profits-fresh air!!

Wednesday, December 12, 2012 at 6:17 AM

Wayne in Hinesville, GA said:

Mac's right. As soon as the goodies run out the idiots will be trying to take what those of us who knew it was coming have. No one will be safe from these predators except those who had the foresight to be well armed and with plenty of ammo. I'd like to add a few to Tod's list of vipers. Harry Reid, Joe Biden, Maxine Waters, Charles Schumer, Steny Hoyer, etc.

Wednesday, December 12, 2012 at 12:53 PM

JAC in Texas said:

Maybe I'm mistaken, but I thought it was the Clinton administration that started the intimidation of financial institutions to force them to make home loans to ineligible customers, including forcing them to count welfare receipts as income for the purposes of loan qualification; the Bush administration then carried on and didn't stop it. The Community Reinvestment Act passed under that idiot Carter and things went down hill forever after.

Wednesday, December 12, 2012 at 3:25 PM

RedBaker in Florida said:

I read Allison's book and it is great, but I have to disagree with Williams. Allison fails to mention the HUD quotas imposed on both the government housing underwriters (Fannie Mae, Freddie Mac and more), on mortgage companies like Countrywide, and on all the big banks which wanted to expand. The quotas started at 30% of all new mortgages in 1992, and were increased incrementally all the way up to an insane 56% in 2008. These quotas were the prime cause of the housing bubble, I believe. By the collapse in 2008 about 48% of all mortgages were less-than-prime. When the bubble popped those unqualified buyers walked away from their mortgages. Edward Pinto has documented the HUD sabotage of financial sanity in his "Government Housing Policies in the Lead-up to the Financial Crisis: A Forensic Study."

Big government has massively interfered all over our economy - they wrecked housing with the HUD quotas, wrecked food prices with the ethanol mandates, caused high fuel prices by a variety of means disrupting fossil fuels and nuclear energy, created a 3rd rate government school system, nearly doubled the cost of medicine by a variety bad policies from negligence of competition to cost shifting by underpaying for Medicare and Medicaid, and they have ruined retirement savings with the social security Ponzi schemes and the underfunded pensions.

Big government's massive market interference is a catastrophe generator. Those catastrophes are big government's excuse to institute yet more market interference, a vicious cycle of economic disaster.

Wednesday, December 12, 2012 at 3:30 PM

Capt. Call in New Mexico replied:

You are absolutely right! The poor saps who voted Obama in, though, are too ignorant to understand it. That they voted for Obama again, even after all of his crimes during his first term, shows that their ignorance has grown.

Wednesday, December 12, 2012 at 4:42 PM

Tapdaddy in Indiana said:

"Allison suggests that if our country had a separation of "business and state" as it does a separation of "church and state," crony capitalism or crony socialism could not exist."
And therein lies the problem.

Wednesday, December 12, 2012 at 4:39 PM

Capt. Call in New Mexico replied:

That's great except for one thing: We do not have "separation of church and state" in this country!

Wednesday, December 12, 2012 at 4:44 PM

dextermassolettisr in san francisco, ca replied:

No such thing -- at inception the proscribing of establishmentarians has been inverted, the Constitution subverted; should there have been the same for corporate governance perhaps it too shall have been turned upside down by now.
The crux is in permissiveness -- the very idea that the non-contributor can have greater-than-equal influence beneficially. Or, that one can give away what does not belong to them in the first place and not be tried for theft.
We have an illegitimate government that makes criminals of law abiding citizens to hide its own crimes -- that cannot last very long in the best of times and these are certainly not the best of times.
Not to worry, if nothing else, the law of gravity will bring them down and that too is the price of doing business.

Sunday, December 16, 2012 at 5:06 PM

TD in Jacksonville FL said:

Thank you Dr. Williams for bringing John Allison's book to our attention. I have been looking for some way to understand the causes and cures for what has happened to the economy, but needed something that would not require an economics degree. I checked the book out of the library and have found it very readable and eye-opening. It's fascinating to see the effects of unintended consequences play out in the real life examples Allison puts in the book. Keep up the good work that you are doing and the great articles we read from you here at the Patriot Post.

Friday, December 21, 2012 at 11:50 PM