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Wednesday, May 22, 2024

The failure of government to properly regulate the economy has directly lead to the subprime mortgage mess that is now the proverbial millstone hanging around the neck of the nation's economy, threatening to plunge us into a Great Depression redux.

The puritanical purveyors of free-market capitalism have made a pastime out of demonizing anyone who questions the infallibility of "the invisible hand."

Those who bow at the altar of Kudlow, Cavuto and Cramer have successfully - and erroneously - combined any sort of government regulation with socialism, transforming an innocuous and monotonous term into a dubious insult.

Government regulation in the name of fairness and transparency has been discarded for a let-the-market-decide ethos of sink or swim. The result of this strict adherence to the reanimation of Social Darwinism - what commentator Cornel West has called "free-market fundamentalism" - has been a windfall for a few and a wipeout for many.

In case you've missed it, here's a brief and generalized primer: a subprime mortgage is a type of loan or mortgage that financial institutions issue to individuals with poor credit who, as a consequence, are deemed to present a greater risk (i.e. for paying back the loan). Because the lender is assuming greater risk in issuing such a loan, subprime mortgages come with higher interest rates. The high interest rates combined with other factors, such as rising gas prices, job losses, health care and other climbing costs, have lead to record foreclosures, the economic effects of which are not limited to those losing their homes. Communities feel the sting of foreclosures as property values tumble and state and local governments lose tax revenue as a result.

The combination of speculative purchasing, predatory lending and the absence of government oversight has created a perfect storm of economic instability that has Wall Street and Main Street equally fearful of a market meltdown.

In the midst of this economic upheaval, what is the government doing? Or perhaps the better question is what should the government be doing? Last week, the Federal Reserve acted swiftly to save a soon-to-be casualty of the subprime incinerator. No, it wasn't a family of four from Fort Myers about to lose their home. It was one of Wall Street's largest and most prominent investment banks, Bear Stearns.

Conditioned on a $30 billion loan from the Fed (yes, that's our tax dollars at work), JP Morgan purchased Bear Stearns at $2 per share. A year ago, that stock peaked around $170 per share. This government-subsidized Bear Stearns bailout represents what practitioners of the dismal science call "moral hazard"- that is, rewarding bad investment decisions with a get-out-of-bankruptcy-free card. The case against such action is it encourages risky investment activities with the knowledge that the cost of failure is simply a government bailout. The rationale for the Fed's bold move rests on the assumption that were Bear Stearns to fall, the repercussions for an already-floundering economy might be too great to bear (forgive the pun).

But what about the more than 200,000 individuals and families whose homes were foreclosed last month alone? Yes, some made bad decisions and purchased a home they couldn't afford, but countless others were the victims of unfair lending practices.

Regardless of which camp these unfortunate souls fall into, if the government can float a $30 billion loan to a former Wall Street titan, why is there no help forthcoming for Joe and Jane Six-Pack? Oh, that's right, we must let the market decide their fate.

Joshua Fredrickson is a political science senior. His column appears on Wednesdays.

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