By Mark Sanford
Friday, September 26, 2008
I am worried for our country -- not so much because of the tumult in the financial markets but because of the federal government's response and its implications.
It seems that each new crisis is met with a new answer from the government. After Hurricane Katrina, the federal government assumed roles traditionally handled by state and local governments. After the Sept. 11, 2001, attacks, the government federalized 25,000 workers through the Transportation Security Administration. The example of security-focused countries such as Israel, which elects to have that function handled by the private sector, did not matter. Now, our federal government is likely to commit three-quarters of a trillion dollars -- more than last year's Pentagon budget -- to a bailout based on what happened in the credit markets last week.
An ever-expanding scope of federal commitment and power is not what made this country great. Expanded power in one place comes at a cost in other places. American cornerstones such as individual initiative and an entrepreneurial spirit -- born in free and open societies with private property rights and the rule of law -- have never fit particularly well within the context of an ever-growing federal government.
For 200 years, the "business model" in our country has rested on a simple fact: that while one may reap rewards from taking risks, one should also be prepared to face the consequences of those risks. Some of the proposed actions with regard to the credit market turn that business model on its head -- absolving those who took too much risk, or bought too much house, from the weight of their own choices. If Congress passes the proposed bailout, we will be destined to have far greater problems in time, leaving those who are prudent in their finances to foot the bill for those who are not.
I am not writing to criticize Treasury Secretary Henry Paulson. I respect his business judgment greatly, and his unenviable task is to find a short-term solution to problems grown by government over the long term. Whether his proposals are right or wrong is less the issue than the question of where we are, as a society, in terms of having government in the business of protecting people from their own financial decisions.
Last week's events were rooted in distressed mortgage securities whose optimistic values were facilitated by quasi-governmental entities Fannie Mae and Freddie Mac. The investment banking capital write-downs were turbocharged by the Sarbanes-Oxley Act, which did what too many laws do -- it fixed yesterday's problem. The amazing expansion of credit was fueled by a Federal Reserve offering an easy-money policy that led us right into a credit bubble. All this was made worse by the government enabling some people's tendency to want more house than they can afford.
With that bubble popped, we will now go through a major financial de-leveraging. It will be painful. Yet to preserve what has made this country great, we need to be on guard against Washington offering endless cures to our ills.
Many of the "cures" that are soon to be offered will have one thing in common -- telling us what others did wrong. Instead of listening to these, each of us as taxpayers must admonish those in Washington to get their own financial house in order. Washington is the master of creative and unsustainable finance, with $50 trillion in unfunded promises.
We will be told of bailouts that "won't cost anything." We should caution policymakers that this has never been the history of bailouts, and remind them of Milton Friedman's suggestion that the capitalist system never works without loss. Investment titans recently featured in Vanity Fair trading $60 million beach homes should never be sheltered from this old-fashioned concept.
We will be told of "temporary" funds and programs. We should remind our leaders of Ronald Reagan's words that the closest thing to eternal life is a government program.
We will be told "trust us" on pricing assets, and we should not -- because no matter how pure one's intentions, no one watches your money like you do. This makes transparency and open bidding incredibly important.
If we do these things right, we will weather the very rough patch ahead and be better for it as a country. If we do not, there will be more parallels between our nation and Edward Gibbon's "The Decline and Fall of the Roman Empire" than we would like to imagine. The difference lies in each of our hands.
Mark Sanford, a Republican, is governor of South Carolina. He represented South Carolina for three terms in the U.S. House and was formerly employed by Goldman Sachs.