Monday, April 14, 2008

Goldwater Institute: Mortgage market will correct itself without Washington's help

Regulation Is the Wrong Answer

by Dr. Tom Patterson

Since 2001, the number of employees in government regulatory agencies has grown from 172,002 to 244,000. Their funding has increased 44 percent, inflation-adjusted.

As a result, Americans face $30 billion more annually in regulatory costs than they did seven years ago. All told, we pay about $1.1 trillion for regulation and compliance costs, about the same as we pay in federal income taxes.

In spite of its massive costs, regulation has been unable to prevent market cycles in the past or to prevent scandals like Enron. Regardless, Washington's answer to the downturn in the housing and mortgage markets has been more regulation.

Free markets are by far the most efficient generators of wealth in the history of the planet. But they are by nature chaotic and unpredictable.

Not only are free markets fundamentally unmanageable, but attempts by would-be commanders to control them can be disastrous. That's when economically foolish behavior becomes the norm.

That is precisely why market corrections should be allowed to proceed. Failed loans should go off the books, investment banks that acted unwisely should suffer the consequences, and housing prices should be allowed to fall so that prudent savers can buy homes.

Predictably, the market is already self-correcting. Derivative contracts and hedge funds today are being structured more conservatively. Balance sheets and equity valuations are being more closely aligned with their underlying assets.

If the politicians don't act soon, their services may no longer be required. That would be their worst nightmare.

Tom Patterson is chairman of the Goldwater Institute, a former state legislator and emergency room physician. A longer version of this article originally appeared in the East Valley Tribune.

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