By the Mackinac Center’s own David Littman in today’s Detroit News:

Reject bailout rush to socialism

Fix government ventures, rules that got nation into trouble, not market

David Littmann

Prudent workers, taxpayers and firms are getting the bum’s rush on a massive proposed bailout from panicked politicians who are weeks away from a national election of extraordinary significance.

In this case, a bipartisan group is forcibly trying to eject this country from a market-based, decentralized economic and financial system. Washington, its politicians and armies of regulatory employees are touting another elixir of taxpayer dollars to fix yet another of their colossal fiascos. The proposed federal intervention (up to a $1 trillion bailout of distressed assets and bonus-paying firms) is the antithesis of what the competitive markets of capitalism would permit.

The problem is not the fundamental well-being of our economic system. At midyear, the U.S. economy was still running at growth between 2-3 percent above 2007 levels, even discounting inflation. The national unemployment rate was 6.1 percent, not the 35 percent of the Depression era. The stock market remained higher than the levels of four years earlier.

No, the problem lies with the bursting of the residential housing bubble that developed an irrational price exuberance (except in Michigan) in the wake of the Federal Reserve’s exceptionally easy monetary policies from 2003 to 2006. Economics students understand this axiom: “Loose money policies create tight credit conditions.”

In this case, the tight credit situation — where banks fear lending, and markets no longer supply bonds or equity capital — emerged because of the collapse of the housing bubble and the suicidal regulatory mandates that politicians and their special-interest campaign fund-raisers legislated. And Wall Street’s pursuit of opaque financial derivatives and the credit rating agencies’ complicity in subprime mortgages played a role.

Yet, to cover their corrupting decisions and past complaisance, Washington’s major mouthpieces — from former Federal Reserve Chairman Alan Greenspan and Treasury Secretary Hank Paulson to Senate Banking Committee Chairman Chris Dodd — now say that unless we trust them with a new round of our scarce resources, the U.S. economic system will collapse. This rhetoric is meant to panic us into accepting a new federal steward of our hard-earned dollars.

But when you dissect the palaver, what you see is a bare-knuckled proposal to further centralize federal control over the marketplace of investments and savings. Such a revolutionary move is socialism. It will not simply be a matter of taxing the rich or those with some ability to pay for the purpose of redistributing shelter to the poor. It will represent an institutionalization of financing immoral behavior. Why?

If I take an interest-only loan with the hope and bet that my new mortgage will pay for itself as home prices escalate, it leaves me free to spend, not save, on other things. I have little reason to defer purchases. When housing prices go south, however, I can walk away as if my payments were just rentals and the lender gets back a depreciated asset. Why reward this kind of behavior by either the lender or the borrower?

Considering the incentives that were in place, we now know why so many fellow citizens chose these reckless options. And clearly, Washington does not want you to remember the four ways it has brought us to this unfortunate moment. Let’s review:

• The Community Reinvestment Act (approved in 1977 during the Carter administration) compelled banks and other lenders to loan money and grant mortgages in areas where they would have never dreamed of making such loans because of the exceptional risks of default. Banks were denied charters for growth and geographical expansion if regulators found them to be out of compliance with these politically correct regulations, enforced by the Federal Reserve and others.

• Government-sponsored enterprises (such as Fannie Mae and Freddie Mac) received taxpayer subsidies to provide mortgages and are favored by politicians and regulators with the privilege of maintaining very thin capital reserves as buffers against losses that result from defaulting on delinquent mortgages.

• Insane accounting rules, the Sarbanes-Oxley regulatory regime and Securities and Exchange Commission rules have contributed to the mess, especially the devastating “mark-to-market” requirement. The financial reports of firms and financial organizations must carry assets on their ledgers as though they were forced to sell them immediately into distressed markets, rather than at book value.

This is like requiring people to send wedding or graduation photos of themselves to newspapers while sick with the 24-hour flu rather than pictures of themselves when they are healthy the rest of the year. No wonder the market seized up.

Regulators require that firms go to the market and raise capital when their assets fall below book value, even if it is a paper value, rather than a real loss, that is registered. When hundreds of large and small firms all seek scarce capital at once, the market can’t meet their needs.

• And the Federal Reserve spurred subprime lending by pursuing inflationary money policies that dropped bank-borrowing rates to 1 percent.

To avoid greater government involvement and messes in the future (think Medicare, Medicaid and Social Security), Washington must extricate itself from the market. As real estate prices become more affordable, credit-worthy firms and individuals throughout the nation and world are ready to pounce on bargains that will appreciate.

The government got America into this situation. The solution is simple: Government, get out.