Update: How Deregulation Socialized the US Housing Market

Fannie Mae and Freddie Mac line up for Federal Takeover!!!   

The Socialization of the housing market continues under a "conservative" administration.  By doing nothing to regulate the housing market which was going haywire for years, "conservative" economic policy drives markets into the brute force control of government ownership and control.  So much for making government smaller and more efficient.

http://www.bloomberg.com/apps/news?pid=20601170&refer=home&sid=auCiw0BP4Fyk

http://www.nytimes.com/2008/09/08/business/08fannie.html?hp 

The whole idea of deregulation is to get the government's hands out of the economy as much as possible. The scale of government involvement in the economy can be envisioned as having communism, complete economic control, on the far left, and no government involvement on the far right. No government involvement essentially is anarchy, and it is generally accepted that some government involvement is needed to perform specific tasks such as coining money or enforcing contracts.

Free marketeers seek to keep that government involvement to the minimum claiming that the market will find a solution to most problems. History is against the free marketeers as every age of industrial advance leads a litter of bodies pointing to horrific problems. The solution invariably ends up in the hands of the government. Why? Because the market is not a single entity, but a conglomeration of competing organizations. To change one's processes to fix a problem is costly to that company which would affect the potential profit from that companies product. If the competitor doesn't make the same changes, the more concerned company will take losses.

The government is a platform which provides a means to enforce changes in process in all competing companies such that all of their profits are effected equally, thus not making it a competitive disadvantage to fix the problem.

As mentioned in previous posts, most regulations come after national tragedies like airplane crashes and economic collapses. The regulations that are put in place after them are specifically tailored to prevent them from recurring (theoretically). Logically, when you remove these regulations, you expose yourself to re-enacting the history which put them in place.

In previous posts, I've already discussed how the financial mess we are in now is a result of this "deregulation," but the government's reaction to the fallout is baffling. The Bush administration frequently aligns itself as conservative and a free market supporter. They publicly discuss letting the market find a solution to a number of federal problems including global warming and the energy crisis. However, when it came to the economic crisis we are in now, they opened the government's resources to try to solve the problem.

The administration has taken the stance that the Federal Reserve will provide support to failing financial institutions which have been viewed as "too big to fail." This stance means that the federal government will act as an insurance firm to high risk businesses. Instead of redistributing risk and firewalling these institutions as it was before the deregulation, the government has accepted these fewer, larger higher risk companies and bought into being the owner to the risk.

This may not seem like a move towards socialization, but one must consider the function of these businesses before disregarding the idea. The businesses that the government has decided to prop up do not produce goods or provide direct customer service. They are financial lenders who take bets on what investments will pay out the greatest financial returns over time. They are by definition financial risk managers. To insure these businesses is to take away the lions share of their business and to reduce their free market function to simply deciding what investment they are willing to expose our tax dollars towards. These businesses are simply masks on the face of a gigantic social program brought to us by the free marketeers misguided understanding of the operation of government.