This video is a couple weeks old, but it is absolutely magnificent. Rand Paul demolishes a bureaucrat and masterfully outlines why bureaucratic red tape restricts freedom and hurts individuals. Beautiful.

A superior product in the marketplace should not require extra help from a government agency, whether it be in the form of a price guarantee for corn (the main substance fed to livestock in industrial facilities), legal code that mandates industrial farming (or heavily restricts other methods of non-industrial farming), or other government subsidies. The fact that industrial livestock facilities rely on government assistance for survival is a testament to their flawed, unnecessary, and undesirable business practices. (If they don’t require government assistance for survival, why continue providing subsidies and other competitive advantages to these corporate industrial livestock giants?) If people prefer to purchase industrial livestock meat over locally grown free range meat, there is no need for subsidies or other governmental involvement. Clearly, subsidies are needed only when a corporation or industry (such as industrial livestock producers) offers a lousy product that people won’t normally desire.

Government subsidies merely provide the illusion of cheap prices, which goes a long way in distorting the prices and actions of people in the marketplace. The fact that industrial meat is the cheapest does not mean it’s a better product or business model, particularly when you account for the government assistance needed to lower the price in the first place. Of course, it is us, the taxpayers, who are providing the subsidies, so the cost we pay for “cheap” food at the grocery store isn’t actually very cheap. We pay taxes to provide farm and grain subsidies, fund the bureaucracies who regulate and administer fines to farmers who don’t cooperate with the industrial system, among other taxpayer-funded programs.

Society is not bearing the cost of water pollution, of antibiotic resistance, of food-borne illnesses, of crop subsidies, of subsidized oil and water- of all the hidden costs to the environment and the taxpayer that make cheap food seem cheap. No thinking person will tell you they don’t care about all that. I tell them the choice is simple: You can buy honestly priced food or you can buy irresponsibly priced food. – Joel Salatin [i]

Clearly the industrial food system has government tilted in its favor; its products are cheap not because of their superior taste or flavor, but because they have managed to successfully crawl into bed with government to dismantle other legitimately competitive businesses. The philosophy of the industrial food system can be summed up in this statement: if people won’t buy your lousy, nauseating product, lobby government for subsidies and other protectionist interventions to dismantle competitors who actually offer a product desirable to the public.

In a true free market of limited or no government intervention and subsidies, a product only survives so long as it appeals to the demands of the general public. As soon as a company offers a product that people do not desire or demand, the company is hit with losses and will go bankrupt so long as it doesn’t change its practices. This occurs because other competitors can easily take the place of a lackluster company who fails to please its customers. Corporations in the industrial food system face no such market competition and customer input, because they are guaranteed government assistance regardless even if people resist their product. Industrial livestock corporations succeed financially based on how well they please government bureaucrats and follow government regulations, not how effectively they can please customers with a quality product. Are you beginning to see the apparent flaws in this industrial, bureaucratized food system of ours? Our current system has come at the demands of government bureaucrats and corporate lobbyists, rather than the demands of people in their local communities yearning for sustainable, clean, tasty food systems.

Industrial Cattle Feeding

The inherent immorality in our current food system is that individuals cannot simply choose to opt out of the system and be done with it. Sure, if a few million of us chose to never again purchase industrial-raised meat, some corporations would face a loss of millions or billions of dollars. However, what would be the corporate reaction? Would they actually change their business practices to match the public’s desire for a local, sustainable, earth-friendly food system? Or would these Agribusinesses lobby government for an extra several billion dollars in subsidies and beneficial regulations to stay afloat? Unfortunately, history has shown the latter is the opted path, as it is with all politically-connected corporations and industries, because it demands little change or adaption on the part of the corporation. As a result, today we are stuck with an uncreative, unsustainable, and frankly undesirable industrial setup that very few people would actually choose over a more natural local food system.

In a true free market system with open competition and no government assistance to businesses, I believe industrial livestock and food systems would be run out of the market within a matter of one or two decades. They would be forced to reallocate their resources to fit the demands of a local food system, or suffer the consequences of consistent losses and, eventually, bankruptcy. The free market is a powerful moral force, because it cumulates the demands and desires of the people by giving each individual the power of choice. The fact that we evidently don’t have a free market within the industrial agriculture system proves that the system must indeed be immoral, unsustainable, or impractical to at least some degree. If it was a moral, worthwhile system, government subsidies would not be necessary to sustain the practices of industrial livestock and agriculture.

The industrial livestock system in place today is not justifiable for one basic reason: it requires government subsidies to stay afloat. I find the greatest moral dilemma with the fact that the system brings in billions of dollars of government support whether customers demand such a product or not. Government’s involvement and propping up of the system has essentially eliminated the power of individual choice, leaving the public susceptible to the whims and desires of corporate lobbyists, government bureaucrats, and our oh-so-wise politicians. The treatment of the animals, the conditions of the factories, the wages of the workers are all secondary. If people are forced to participate in and fund a system they find morally or ethically reprehensible with no option of withdrawal, it is absolutely not justifiable. It is tyrannical.

Journalist and economist Henry Hazlitt wrote in 1933, “It is obvious that under the present N.R.A. programme the American consumer is to become the victim of a series of trades and industries which, in the name of ‘fair competition’, will be in effect monopolies, consisting of units that agree not to make too serious an effort to undersell each other; restricting production, fixing prices,—doing everything, in fact, that monopolies are formed to do.” Hazlitt was one of the few public skeptics of the NRA at the time, and it wasn’t long before his predictions proved to be correct.

In less than one year after the formulation of the NRA Jacob Maged, a Jersey City, New Jersey tailor, garnered national interest after failing to comply with the Code Authority. On April 20, 1934 Maged, a Polish immigrant and father of four, was sentenced to a 100 dollar fine and 30 days in the county jail after he pressed a suit for 35 cents, 5 cents below the 40 cent price floor set by the NRA. The New York Times story headline on April 21, 1934 ran, “TAILOR GETS 30 DAYS FOR CUTTING PRICES.” The Times reported, “[Maged] believed that the codes were designed to help the ‘little fellow’ and could not believe that by charging 35 cents instead of 40 cents to press a suit would put him behind bars.” Maged spent three days in jail, and was released after agreeing to comply with the NRA code.

Another famous case of punishment under the NRA came with the Schechter family, who founded and owned Schechter Poultry Corp. in New York City. In April 1934 President Roosevelt approved the “Live Poultry Code” for the New York City poultry industry, and in July 1934 the Schechter’s were arrested and charged for violating the code. The charges against the Schechter’s included failure to operate by the minimum wage and maximum working hours code, as well as selling “unfit chickens” as defined by the Live Poultry Code. (The latter charge is unique because it was an intrastate transaction, which prior to the NRA was outside the regulatory jurisdiction of the federal government.) The Schechter’s pleaded not guilty to all charges, and their case climbed to the heights of the Supreme Court. In Schechter Poultry Corp. v. United States (commonly called the Sick Chicken case) the Supreme Court unanimously sided with the Schechter’s and declared the NRA unconstitutional on May 27, 1935.

The NRA codes were implemented with noble intentions to lessen “cutthroat competition” and level the competitive playing field, but they tended to do just the opposite. The codes expanded both government and corporate power to define regulations and force innocent businesspeople, like Jacob Maged and the Schechter’s, to operate according to the whims of industry executives, government bureaucrats, and the United States President, rather than for the interests of customers. (Obviously it is in the interest of a customer to be charged 35 cents rather than 40 cents to get a suit pressed, but it isn’t in the interest of a competing tailor.) As the Supreme Court confirmed, the NRA was an unconstitutional expansion of congressional and presidential power to regulate local intrastate commerce and control business practices. In the words of Associate Justice Louis Brandeis, “This is the end of this business of centralization, and I want you to go back and tell the president that we’re not going to let this government centralize everything. It’s come to an end.”

Sources

DiLorenzo, Thomas. How Capitalism Saved America. New York: Three Rivers Press, 2004.

Hazlitt, Henry. “The Fallacies of the N.R.A.” The American Mercury. Dec. 1933, 422.

“TAILOR GETS 30 DAYS FOR CUTTING PRICES.” The New York Times. 21 Apr. 1934.
http://mises.org/pdf/tailor_imprisoned.pdf (4 Nov. 2010)

“Schechter Poultry Corp. v. United States – Further Readings”. Law Library – American Law and Legal Information.
http://law.jrank.org/pages/10018/Schechter-Poultry-Corp-v-United-States.html (8 Nov. 2010).

Harry Hopkins, “Statement to Me by Thomas Corcoran Giving His Recollections of the Genesis of the Supreme Court Fight,” April 3, 1939, typescript in Harry Hopkins Papers.

Since the early 20th century it has been the initiative and policy of the federal government to lower the price of housing so every single family could own a home. Other arrangements that would commonly arise in a free market (such as renting) just don’t fit into the government’s version of the “American dream.” One of the first to lobby for governmental support of individual home ownership was President Herbert Hoover. On July 22, 1932 Hoover signed the Federal Home Loan Bank Act, and he explained the purpose of the bill “is to establish a series of discount banks for home mortgages.” In other words, the federal government would help organize the mortgage loan industry and provide cheaper loans for people to obtain, thus increasing home ownership. Hoover went on to explain:

“In the long view we need at all times to encourage homeownership and for such encouragement it must be possible for homeowners to obtain long-term loans payable in installments. These institutions should provide the method for bringing into continuous and steady action the great home loaning associations which is so greatly restricted due to present pressures.” — Herbert Hoover (Emphasis added.)

The “present pressures” of course being the Great Depression, an eensy-weensy economic slump that resulted in banks giving out fewer loans. Still, Hoover thought this was an appropriate time for government to encourage people to buy a house even if the economy was in dire circumstances. So began the history of the federal government’s intervention in the mortgage market, often subsidizing or forcing banks to lower their lending standards and give loans to people regardless of their ability to pay them back.

Taking Hoover’s actions a step further, President Franklin Roosevelt signed a bill that led to the formulation of Fannie Mae 1938. (Fannie Mae was split up into Freddie Mac and Ginnie Mae as well under the Johnson Administration.) Interestingly, these government-sponsored enterprises (GSEs) were created to help bail out banks who were faced with (wait for it…) a growing number of mortgage defaults.

Essentially the scenario looks like this: First the government organized banks to lower the price of mortgages in 1932; once people bought the loans, however, many were unable to pay them back and forced to default; upon seeing this flow of events, Roosevelt attempted to bail out the industry by creating Fannie Mae in 1938. This was the beginning of the secondary mortgage market, the practice where the GSEs (using taxpayer dollars) purchase mortgages from banks, thereby freeing up money for the banks to provide more mortgages.

“The GSEs are companies created by Congress to bring liquidity, stability, and affordability to the nation’s residential mortgage markets. Traditionally, we’ve fulfilled this role by purchasing mortgages in the secondary market and bundling them into mortgage-related securities that can be sold to investors or held in our portfolio.” — Ed Haldeman, Freddie Mac CEO

This new setup encouraged banks to offer loans to riskier clients who in an actual market scenario would not be eligible to purchase a mortgage. Because of government’s creation of the secondary mortgage market banks found themselves with extra liquidity, which was used to offer loans to financially-insecure individuals. It’s not tough to do the math: riskier customers lead to a higher likelihood of default. These policies have the least desirable impact on the poor people they are intended to help. In reality,  it is much more economically feasible and sensible for a poor person/family to rent a house or apartment than to buy a house. However, artificially low mortgage rates lure poor people into an investment they won’t possibly be able to pay back. Government’s intervention creates a market imbalance that pushes the poor into buying a house when it is almost certainly not in their long-term interest to do so.

The painful effects of foreclosure we see today are the inevitable consequence of ongoing government meddling in the mortgage market. Government either subsidized or forced banks to offer risky loans to risky customers, but when the entire scheme begins to collapse we’re told it is a failure of the free market. (As if Fannie Mae, Freddie Mac, the Federal Housing Administration, and other such entities were created through free, voluntary exchange and not by politicians and bureaucrats.)

Before someone blames the current economic mess on “deregulation” and injustices of the free market, consider this action undertaken by the Clinton Administration, as explained by the New York Times:

“In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.”

…

“In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980′s.” — New York Times; September 30, 1999

Historical evidence clearly shows that government has led the endorsement of subprime mortgages and lower lending standards, with complete disregard for the economic misery that erupts out of such policies and programs. Increasing bailouts will merely delay and worsen the inevitable collapse of the modern mortgage industry that government has played a major role in creating and sustaining.

Even so, you might say, on September 24, 2008, John McCain suspended his presidential campaign with the selfless objective to pass emergency legislation to “protect taxpayers and homeowners,” so the government must know what it’s doing, right? What America got in September 2008 were the TARP bailouts which, given the situation of the mortgage market today, haven’t done squat to “protect homeowners.” Given the government’s miserable record of attempting to provide affordable housing, who in the world expects more government intervention to save homeowners this time around? You can’t save a drowning person by throwing more water on him, nor can you save a government-manipulated economy with more government intervention.

The free market is the best tool to save the housing market and actually provide affordable housing for those who need it. Allowing liquidation of the housing market is necessary and would bring a short-term correction, but it would end the ongoing misery homeowners are experiencing due to government manipulation in the first place. Housing prices would drop to levels most potential homeowners could actually afford, and it wouldn’t require one dollar of government intervention.

For a true recovery to take place you don’t need increased government spending, intervention, or control; all that’s needed is a return to the free market, where individuals will manage their lives and economic decisions far better than any politician or bureaucrat in Washington D.C. The free market is the only option for a sustainable, lasting, and prosperous recovery.

The main flaw with the FDIC and the current banking system is that the control does not lie with the individual. Government’s history in banking has amounted to protecting banks, offering special and unnatural privileges to financial institutions (what other industry has a “lender of last resort” and a government program to help pay for risk?), and diminishing the regulatory power of the individual. A free market encourages and generally requires individual initiative, research, and understanding of the product, all of which the FDIC has assumed as its proper role.

What other industry needs a government agency to fall back on if they make unsustainable and irrational decisions? The truth is that the FDIC’s role is nothing more than to bail out bad management decisions and an inefficiently run business. Can you imagine what such a system would have done to an industry like technology? Tech companies would have much less incentive to improve their products if they knew they had the federal government guaranteeing major consumer losses.

By attempting to cover different risks in banking, the FDIC removes the incentives of banks to avoid those risks. It removes the incentive for individuals to scrutinize their potential banking options more carefully. If you know that all or the majority of your deposit is insured by the government, why bother with the details of bank management, financial health, etc.? Like economist Peter Schiff said, people spend more time researching a toaster than they do opening a bank account.

The FDIC’s softening or total removal of incentives to avoid and search for risk also slows the development of other options to banking. The amount of banks and the style with which they operate has not significantly changed since the FDIC came into existence in the 1930s. Nearly any other industry you can think of has undergone some major changes in operation over the past seventy years, while banking is essentially the same.

The FDIC locks people and businesses into a certain style of banking. (What banks and individuals wouldn’t want government guarantees of deposit insurance?) This may be fine and dandy for a time, but it stalls the development of what could be much more sustainable and sensible financial options for individuals, such as credit unions. With government regulators and bureaucrats calling the shots, rather than the free individuals of the country, new developments that would better serve the individual have been heavily limited and discouraged.

The slightly hilarious part is that in the event of a true banking meltdown, the FDIC wouldn’t have near the amount of necessary funds to ensure depositors got their money back. According to the FDIC’s own website, they manage an “insurance fund” of more than “$52.8 billion,” yet the agency “insures more than $4.3 trillion of deposits in 8,494 U.S. banks and thrifts.” Let’s see… $52.8 billion of funds to cover $4.3 trillion of deposits. Yes, the FDIC carries enough cash to cover a whopping 1.23% of the total deposits that it claims to insure.

The FDIC does not expand the power of the individual to make his own choices in the marketplace; it builds corporate loyalty to government standards, not individual standards. The problem with the banking system to begin with was the neglect of the individual’s regulatory abilities, the FDIC is simply an expansion of that unfortunate trend. The folly of the modern banking system is that it does not encourage individual initiative, research, and involvement in banking as a free market system would.

Rather than encourage free and alternative choices like individual deposit insurance plans, community credit unions (where individuals have a stake in where their deposits are spent), or discretion as to where one saves or invests their hard-earned money, we have consistently moved toward a centralized, bureaucratized, planned banking system. Such a system makes it extremely difficult for individuals to effect real change with their own local regulatory power, and prevents a truly sustainable and involved financial industry from coming about. Only the free market can guarantee a system swayed not by the government, but by free men and women exercising their ultimate regulatory authority as individuals.

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Profit represents the reward for taking a risk. You wouldn’t start a business if you knew you weren’t going to make more than you would spend creating that business, would you? However, if you can increase your income more than your expenditures through that business, you’ll feel much more inclined to continue with the operation. Obviously, people cannot survive operating a business at a loss.

Profits do not come without work and risk. It is only possible to make a profit if you can offer a product or a service, that people want, in an efficient manner. No matter how greedy you may be, in a free market you cannot survive without efficiently producing a product that has market demand. You cannot force people to work for you, you cannot force people to invest in your business, and you cannot force people to purchase your product. Your greed is limited to free and voluntary exchange.

Profits have been especially dissed when it comes to health care. It is easy to blame the insurance corporations and many missteps that the current system carries, but people fail to realize that it has been government intervention into the market that has increased prices and decreased accessibility. The more that government regulates, controls, and manipulates health care, the less access individuals will have to health care because of the higher costs.

The Kefauver Harris Amendment of 1962 was added on to the Federal Food, Drug and Cosmetic Act of 1938, providing the FDA with greatly expanded regulatory powers, including the ability to deny approval of drugs that they felt weren’t fully effective. The FDA’s regulatory process to bring new drugs into the market is very costly in terms of money and time, making it exceedingly difficult for businesses other than large pharmaceutical corporations to survive in the drug market. Dr. Mary J. Ruwart estimates that no less than 50% of new drugs have been blocked from the market due to this process.

Because of the 1962 amendments, the FDA can determine and change the requirements to bring new drugs from the laboratory and into the marketplace. In 1962, the development phase of drugs took approximately 4.5 years. A good amount of time for a business to invest money in a product that might never get the chance to sell on the market, right? Today the development time is 15 years. With such brutal development and marketing procedures for drugs, it should be no surprise that drug prices are rising. These regulatory proceedings limit the supply of new drugs, raise the price of existing drugs, and limit patient access overall to drugs. In other words, the demand for these drugs does not disappear, but the supply is often heavily limited. Thus, prices go up.

With the drug market essentially limited to the few businesses who can afford to comply with the expensive FDA regulations, competition has taken a beating. Drugs often represent a more affordable method for prevention, treatment, and a general tool to lower medical costs. However, the FDA has so greatly limited potentially life-saving drugs that medical costs continue to rapidly expand.

If it was the patients, not central bureaucrats, who worked with their doctors to decide whether or not certain drugs were logical for their own situation, competition in the drug industry would flourish, prices would fall, and accessibility would increase. We need to understand that government intervention comes with a price by benefiting larger corporations and limiting the competitive ability of smaller businesses.

I am not discounting the effects of greed and the want/need for profits that is inherent in some individuals. But the answer to these problems is not more government intervention or centralization of the markets. The trouble that we face in health care and many other industries is precisely too little competition, a trend that government has consistently worsened. Just look at the drug market: it has become such a bureaucratized process that it ends up helping the larger corporations, hurting small businesses, and pinching the consumer in terms of choice and cost.

The power of the individual is the power of choice: the ability to choose your own insurance plan (without being forced into an employer or government option), and to choose which drugs and medical treatment make sense to you, not to federal bureaucrats. The more power that you transfer from the individual to the government, the more you will see lobbyist activity, corporatism, and inefficiency increase. We are constantly trying to force a one-size-fits-all system on the country (whether it be HMOs or “public options”), neglecting the fact that we are all very unique as individuals and might have better ideas for ourselves, even if politicians turn “bipartisan” to force legislation on the people.

The key point is that demonizing profits in support of a government plan completely misses the underlying problem: limited competition. You do not need government to encourage competition, you need freedom of the individual, freedom of choice, and freedom of competition to create a prosperous, healthy, and accessible market.

It is amusing that so many people are hopping on the bandwagon that government operating at a loss is somehow more noble than for-profit businesses. The whole reason that government can operate at a loss is because it borrows from foreign nations, prints and devalues the currency, and forcefully taxes private productivity. As much as people would like to believe it, government cannot defy the laws of economics and common sense over the long run. They may be able to operate Medicare, Medicaid, and countless other programs with trillion dollar deficits for a time, but it will come crashing down just as it would for any irresponsible business that chooses to spend more money on unprofitable activities.

We need not look any further than the drug industry to see how disastrous a powerful, unelected, and centralized bureaucracy can be. The FDA has powers intended to help the people, but its very policies to help people have likely caused far more deaths and suffering by preventing and limiting new drugs, raising the price of current drugs, and decreasing accessibility to drugs because of the higher prices.

True, revolutionary, and sustainable change can only come through the individual. Profits themselves are not the problem; discouraging competition for those profits is the problem. Government provides a de facto monopoly to large corporations when it gets as involved as the FDA in private affairs, laying the foundation for a system that can never fully serve the individual. For full individual service, the individual must be in full control.

Today “Cap and Trade” and limiting carbon emissions is a top priority for Barack Obama and many politicians. To dismiss claims that this legislation would hurt the economy, corporate leaders are stepping up to the plate to support the legislation. In fact, quite a few major corporations have supported legislation of this sort over the past decade, such as Dupont, Dow Chemical, and Caterpillar. These corporations must be fighting for the noble cause, right? Not entirely.

What we hear is the supposed benefit of the government regulating carbon emissions in the name of the planet. What we don’t directly see is who pays for those regulations and how they pay for them. Regulations are not cheap to enforce or to comply with. What’s key to understand is that large corporations, who have more money and manpower than their competition, will not have a tough time working with the regulation.

But what about the smaller businesses in the marketplace? Clearly regulations that cost several million dollars per year will effect a $500 million company more than a $50 billion company. When you take this into account it is quite simple to see why many corporations are pushing for more regulation: it stifles the competition, who are forced to allocate more manpower and money to meet regulation. That money will come away from product development, wages, production, etc., and things of that sort, while forcing businesses to either raise prices or scale back on other areas of business that made them competitive in the first place.

When government pops a new regulation on the market, it requires money from the taxpayers to enforce and money from the businesses to comply with. Always take it as a danger sign if large corporations are supporting or actually encouraging government to pass new regulation. They see that more regulation means less effective competitors; history has not shown it any other way. If the corporations really felt that strongly about limiting emissions, absolutely nothing is stopping them from voluntarily doing it right now. At the heart of it, regulation often represents an indirect subsidy to corporations.

In the early part of the 20th century, hemp was a major competitor to many different industries: fuel, paper, clothing, among many others. William Randolph Hearst, a wealthy businessman who owned vast amounts of timberland used to create paper, saw hemp as a major threat to his position in the paper industry (given that hemp was a much more sustainable source for paper). Similarly, Dupont would have had a tough time had hemp plastic been allowed to compete with its plastic made from oil and coal. Hearst, Dupont, and other corporate interests fought to criminalize hemp through government in 1937. Hemp was thrown in with the government’s scare campaign against marijuana and cannabis merely because very powerful interests were fighting for it. Because of this, one of the most remarkable and efficient plants is still illegal to grow in most states.

Regulation has this effect both at the state and federal level. Within the past year, my home state of California passed an act in the name of “animal rights.” I am a staunch believer in the humane treatment of animals, but this regulation will hurt smaller farms most (who usually treat animals better than the large-scale corporate farms) who do not have the resources to comply with complex laws. While the thought behind the regulation may have been good, it will simply give the corporate farms (who often treat animals far less humanely than smaller farms) a competitive advantage over smaller and more sustainable farms.

The problem with government regulation is that it actually takes power away from individuals, consumers, and the local level. This is precisely because it is the smaller businesses who suffer from government regulation the most, and that government regulation will increase the inefficiency of competition in favor of larger corporations. By indirectly shifting the advantage through regulation, government decreases choice, limits competition, thereby increasing prices and hurting consumers the most.

Quite simply, government regulation decreases the regulatory oomph of the individual. As more regulation and laws are constantly being proposed and passed by politicians, the fate of a business lies increasingly on pleasing government, not the individual. The power tilts to government force rather than voluntary exchange.

Unlike government regulation, in a true free market consumer regulation is indifferent to the size and power of a business. In a true free market, a business must serve the interests of the individual, not government, to survive. In a true free market, individuals searching for the best product or best service at the best price outweigh the regulatory ability of government bureaucrats.

Regulations do not fall out of the sky and suddenly make things better. They have a cost, both in the short-term and the long run. With government regulation, effective competition is decreased because of lack of resources to comply with the regulation. With a free market, competition is decreased because of nonproductive practices. Government regulation does not discriminate between productivity and wealth. In a true free market, productivity, not wealth, is rewarded regardless of size.

More cries for government regulation will often come from individuals, corporations, and politicians alike. What must be realized is that as the regulatory power of the government increases, especially so on the federal stage, the regulatory power of the people and the market decreases. Government regulation might be seen as the attractive option in the short-term, but it is only the individual’s regulatory power that can shift the economy and society in a sustainable direction over the long run. The demands of the people, not bureaucrats, pave the road of true security, freedom, and liberty.

The first problem with this proposal is that it completely disregards how this bubble and bust came about. “Lack of regulation” did not cause the bubble or the pain we feel today. In fact, it was the federal government and Federal Reserve who were actually encouraging banks and lenders to lower their lending standards to riskier customers. The government was pushing lower lending standards in the name of equality and the right for lower income families to own a home.

In Obama’s plan banks would be forced to hold the mortgage-backed securities they create and sell to investors, with the belief that they will be more conservative with their loans if their own money is on the line. The problem with this is that it ignores how mortgage-backed securities, or the secondary mortgage market, came about. For those who don’t know, the secondary mortgage market is where a bank sells a loan it made with a customer to another business, relieving the bank of the responsibility to maintain that loan. The business buying those loans from banks may hold them in its portfolio or group them into mortgage-backed securities and sell them to investors.

This market started with Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) created in 1937. Fannie and Freddie have enjoyed special privileges and treatment since their creation. They created the secondary mortgage market to give banks the opportunity to give more loans (and thereby sell them to Fannie and Freddie) and therefore give more people the chance to borrow money to buy a house.

In the 1990s, the Clinton administration continually pressured Fannie and Freddie to buy riskier mortgages from banks. This would encourage banks to sell mortgages to lower income individuals regardless of the increased risk of foreclosure involved. In 1999, after pressure from the federal government, Fannie Mae lowered some of its previous standards so it could buy riskier mortgages from the banks.

We often hear today that it was greed, deception, and lack of regulation that pushed subprime mortgages onto the market, when in reality these risky loans were being openly encouraged by the federal government. The mortgage bubble would not have been possible had it not been for Fannie and Freddie and the special government treatment they have received since their creation. Any government agency involved in the housing market (in both the Clinton and Bush administrations) was pressured to lower mortgage standards, allow lower income individuals and families to get loans, and ignore the extra risks and consequences.

The very reason why many politicians didn’t want equal treatment and oversight for Fannie and Freddie was because they thought it would take away the GSEs’ ability to “commit” to riskier customers. The government was pushing “affordable housing” by lowering mortgage standards in any way possible, rejecting the market’s natural rates of risk, and ignoring the risks involved with increased loans to people who clearly couldn’t afford them.

No one in government pushing these practices believed they were adding to an unsustainable and deadly bubble, and no amount of government regulators would have had the nerve to ignore what Congress, the President, and the Federal Reserve were all pressing for. The push for decreased mortgage standards for lower-income people gradually spread into decreased standards for the mortgage industry as a whole. Subprime mortgages were not the only portion of the mortgage market that crashed, many “prime” mortgages faced high foreclosure rates because of the spillover of decreased lending standards.

Obama’s plan assumes that forcing businesses in the secondary mortgage market (mainly Fannie and Freddie) to own part of their own mortgage-backed securities will solve the problem. If the government suddenly has to jump into the secondary mortgage market to ease and control the industry, why are we not simply allowing Freddie and Fannie to compete on the free market, suffer the consequences of unreasonable practices, and go bankrupt if necessary? Instead allowing Freddie and Fannie to fail because of their poor practices, the government nationalized the two corporations last year. The secondary mortgage market would not have been possible had it not been for the government’s unending support for Fannie and Freddie. Rather than look at the root cause of the problem, Obama is taking an issue that the government essentially created and sustained and using it as an excuse to increase government regulatory power.

People rarely ask how banks suddenly got the money and ability to loan to people who obviously should not have gotten loans. In response to the bursting tech bubble and weak economy, then-Federal Reserve Chairman Alan Greenspan lowered the Fed’s interest rate to 1% for a full year starting in 2003. Greenspan kept rates artificially low for one purpose: lower rates mean banks can borrow more money, which they can loan out to more people (who otherwise couldn’t have gotten those loans) who will go out and spend those dollars. Lower interest rates encourage spending, borrowing, and discourage saving; if they are held at artificially low levels that money will drift to areas that it never would have gone before. By keeping rates at unsustainable and artificially low levels, the Fed gave banks the money and opportunity to loan cash to people who otherwise never could have gotten it (i.e. subprime mortgages).

The Federal Reserve’s easy money and cheap credit policy played a huge part in giving banks the chance to take advantage of their lowered lending standards. Lower lending standards coupled with the artificial credit from the Federal Reserve put the subprime mortgage market in full gear. Without the Fed, the banks could not have gotten that cash in the free market. It is frightening that the practices employed at the Fed, which were so instrumental in causing today’s mess, are now being looked upon as the solution. The leaders of the Fed are the very people who ignored the bubble forming from their own policies.

In 2005 Ben Bernanke said that rapidly rising housing prices “largely reflect strong economic fundamentals.” At the same time Greenspan said the housing market was merely experiencing “froth,” not a bubble, and would only correct in local markets. Why in the world would we want to give more power to the Fed and the people who manage it when they continually ignore the consequences of their easy money policies and denied for years that the housing bubble was unsustainable and irrational? Why are we listening to the people who helped create the problem, ignored the problem for as long as possible, and suddenly feel they have all the answers that will lead to massive economic damages if not put into place?

The fact that they see the same policies that brought us into this mess as the perfect solution should caution everyone about their judgment. Artificially low interest rates and cheap credit may boost the economy in the short-term – even for a few years as it did after the tech bubble burst until 2007 – but they will guarantee another bubble of this magnitude and a more disastrous bust several years down the road.

Because of the policies endlessly pursued by the Fed and the government over the past year (artificially low interest rates, bailouts, increased intervention) do not be surprised to see excessive malinvestment in the years ahead, a period of artificial wealth (just as the tech and house bubble “wealth” proved to be nonexistent after their respective bubbles popped), and a painful collapse.

Obama’s new regulatory plan is nothing more than a continuation and massive expansion of the exact policies that brought us to this point. More government and central control will not solve problems that they themselves were strongly supporting when the economy seemed to be in great shape. Obama’s plan simply hands buckets of gasoline to the arsonist watching the fire he started.

You will notice that at every election the talk is always about how government will improve or stimulate the economy. Government is seen as the answer from both parties to build the economy to their liking. As government has worked itself into the economic affairs of people it is increasingly looked upon as the ideal way to stimulate the economy or “save and create” jobs.

The most crucial thing that we cannot ignore is the Constitution. The document that is supposed to restrain government gives absolutely no mention that its purpose is to create or maintain jobs, “strengthen” the economy, or get involved in any economic planning whatsoever. The Founders originally recognized that the federal government was to have very little control over the economy, in order to secure the freedoms and liberties of the people to make and control their own decisions.

Gradually over the past century, those in government have ignored the essential economic freedoms that were strongly protected in the Constitution. The passage of the 16th Amendment in 1913 and the ability of the government to tax citizens marked a beginning of the government’s economic entrenchment. How does giving the government the power to control how much of your own labor is actually yours even come close to fitting in with economic freedom? The ludicrous idea that we work several months every year for the government tramples the laws of freedom. It is central planning in one of its worst forms.

The expression (included in the Constitution) “regulation of commerce” was suddenly taken as an excuse to regulate the production, manufacturing, distribution, and sale of any product or item that the government felt it needed to. In the Founders time, regulation simply meant “to make regular.” Today government uses the word to influence or control next to anything it likes. This includes absurd regulations such as how much water a toilet bowl can hold and the size of holes in Swiss Cheese. The Constitution does not give the federal government near the authority to get this involved in affairs that would easily be solved by the people, market, and if necessary, the states.

Government has gradually shoved itself into the economy and individual affairs of the people. The Constitution’s protection of these basic rights seems irrelevant to the bureaucrats who can’t find anything that they won’t tax, regulate, or control in some manner. As the government takes more control from the people and adds to its own unconstitutional power, people become more reliant on the services of government. Individual initiative and responsibility slowly go out the door.

I cringe when I hear that the government needs to stimulate the economy or create jobs. Many people are so ignorant to believe that if we give government just a little bit more power, a little more control, that things will improve. It is a dangerous trend when people trust government more than their own judgment and choice.

Economic sustainability cannot come from government. It is impossible for government bureaucrats, regulators, and planners to calculate rewards and corresponding risks than the people who are actually putting their time, money, and labor on the line. As we have seen largely in the past decade, these public officials have absolutely no connection to fiscal sanity and the concepts of living within your means and suffering the consequences of reckless behavior.

Many politicians won’t stop preaching that the free market brought us into this economic mess. They say that capitalism and freedom breed greed and corruption. We can be sure that these statements are full of hot air when you consider that we haven’t had a “free market” for quite some time. Government has gotten itself so entrenched in individual lives, businesses, industries, and the whole economy that it isn’t humanely possible for us to have or have had a “free market” in recent history. The effects we are seeing today are the direct results of central planning, a government with little regard for the rule of law, and the consequential disregard for individual responsibility, personal freedom, and local governance.

I would hope that people can see the failures of central planning just by looking at the events of the past couple years. It is grossly unconstitutional, intrudes on the most basic traits of human nature, and does nothing but transfer the power of the people to the government. It is not sustainable, efficient, or productive. On another level it is not moral, sensible, or legal.

In short, government is not here to create, save, or guarantee jobs. Government is not here to stimulate the economy. Government’s primary purpose, as the Founders and the Constitution recognize, is to protect and defend individual liberty and freedom (including economic liberty). Government in its best role, which the Founders tirelessly pursued and fought for, is one that stays out of the affairs of the people, allows them to make their own decisions and choices, so long as they don’t intrude on the freedom or liberty of another individual.

Liberty is one and the same; it is not meant to be separated by government into groups, economic liberties, or civil liberties. Constitutionally (and I would think morally) the government does not have the authority to decide which liberties we can and cannot manage on our own, whether it be financial liberties, economic liberties, or civil liberties. One natural liberty without another is like a tree without its roots or branches. All-inclusive individual liberty is the only true liberty.

Let’s stop for a moment and consider what decreases cost and increases efficiency better than any government agency, regulation, or bureaucrat. Competition. Look at the technology industry over the past 15 or 20 years as a great example.

In the early 1990s cell phones and computers cost a bundle, were limited in their capabilities, and were largely a luxury item. These are some of the items that have escaped much of government’s grasp and intervention over the past couple decades, and look what happened. Competition flourished, prices decreased relatively quickly (and continue to decrease in many areas of the industry), and the features on cell phones and computers have reached incredible levels. This was not thanks to the government trying to manage the industry and set the standards for consumers. People choose for themselves, competition is free and open, and prices greatly decrease while the quality of the items reach new highs everyday.

The problems with inefficiency in Detroit will not be solved by more government intervention, bailouts, and special treatment. Nor will it solve our dependence on foreign oil. Competition in the market will solve these problems in a far more efficient, reliable, and less costly manner.

The first step is to let the Big 3 go bankrupt if necessary and reorganize into a viable business (or businesses). There is nothing with GM, Ford, or Chrysler that justifies preventing their bankruptcy by bailing them out with taxpayer dollars, and continuing the parenting treatment. They can grow up, accept the consequences of dumb mistakes, and readjust like everyone else. Yes, it would be painful for a year or two, but they would be required to come back with a smart business plan, efficient vehicles, and the ability to compete against the stronger Japanese automakers.

This would do much more good in the long run than the government’s endless involvement in the industry. Government limits consumer choice when it prevents an inefficient business from failing and subsequently readjusting to what consumers prefer.

If it is dependence on foreign oil you’re worried about, why not open up competition there as well? It makes little sense to ban nuclear power, heavily limit coal production, prevent a good deal of domestic oil drilling, and complain that we are too dependent on foreign oil. Why don’t consumers, communities, and states choose for themselves which energy sources are worthwhile, instead of the federal government? Give people the power of choice.

There is not one ideal energy source for every person, community, state, or country. Energy should not necessarily be treated as such a national issue, because at the heart of it energy needs start at the local level. Just look at some of the major problems caused by the federal government’s involvement in energy: a costly foreign policy partially built around the prospect of oil, the numerous subsidies to fund inefficient corn ethanol and E85, and even with the cries against CO2 we are prohibited from expanding the one major energy source that does not emit any CO2, nuclear power.

Choice of energy would tear down our need for foreign oil. It makes little sense to put the control of energy in the hands of the federal government, which can’t come close to taking into account local energy needs, preferences, and sensibility. Plus, it is the general governing, such as energy policy, that is constitutionally a state issue. The Rule of Law can’t simply be ignored when it is inconvenient for the government’s agenda.

A level playing field comes best with the free market. People should be free to make their own decisions (through their communities and state governments, if need be) with energy. Oil, nuclear power, coal, solar power, wind power, biofuels, and many other sources all have their ups and downs, and it is ridiculous to think that the federal government can effectively manage and distribute them. Give the market the ability to explore and innovate current energy sources as well as the new alternatives popping up.

The auto and energy industry will likely see increased intervention by the federal government in their affairs, while free and competitive choice slowly slides to the back of the room. People don’t have the influence they once had with their own decisions, because the federal government has apparently given itself the power to choose which businesses can fail, which products we can and can’t use, and even the power to take taxpayer dollars and hand it to private corporations.

More individual freedom and choice will hardly run our situation further into the ground. Rather, it is the choice and freedom of these industries that will further expand their sustainable development, efficiency, and promote the interests of the people over the long run.