Sunday, September 2, 2007

Shuster column: Subprime mortgages need oversight

The subprime mortgage loan disaster provides another example of the financial calamities possible when our revered free-market economy is left unshackled.

Along with the savings and loan debacle of the 1980s, a catastrophe caused by deregulation and greed that cost taxpayers more than $100 billion, the subprime saga should not be forgotten when one hears the shrill cries of free-market evangelists demanding freedom from government directives.

The subprime crisis is merely an example of the pitfalls of a free-market economy. Corrupted unregulated subprime institutions are not eligible for rescue with federal dollars. They will fall by the wayside to nobody’s dismay. Also enthusiasm for investments involving subprime mortgages will wane. The market will adjust without government intrusion.

Yes, all will be well for those clever enough to make a bundle of cash off this fiasco, as it was for those who successfully bilked the savings and loan industry. As is usual when the “free market” goes sour, government came to the rescue.

In response to the subprime crises and the resultant drop in available credit, central banks injected cash into financial systems and the Federal Reserve dropped interest rates. Wall Street could breathe a temporary sigh of relief.

Unfortunately, subprime borrowers will not benefit from the above interventions, perhaps diminishing their enthusiasm for our free-market system. Many will lose their homes and face an insurmountable level of debt. Some may spend the next decade wandering through our judicial system in search of someone who might provide restitution of their losses. Wish them well and try to remember their plight when your free-market friends trumpet the benefits of deregulation and privatization.

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