Whatever happened to laissez-faire?

It seems as if the hot topic being debated by the men and women who are running for president in 2008 has become the economy, and specifically how as president they would “manage” or “lead” it. It’s not surprising that the topic is up for discussion given the apparent dark clouds on our economic horizon. What is surprising is that few seem willing to question the reasonableness of the idea that any president would have either the authority or the ability to manage our free market economy.

I can think of one incident where the idea was called into question, however. There was a striking moment in the Republican primary debate in California a few weeks back when the four candidates who were still competing for the nomination at the time were asked what qualified them to “lead the economy.” As usual, only Rep. Ron Paul’s answer to the question reflected any respect for the role of government as defined in the Constitution.

He pointed out that the president is “not commander in chief of the economy” and that the president “is not supposed to manage and run the economy.” The startlingly direct response was met with the typical smirks and/or glazed expressions all around, and the conversation quickly returned to stimulus packages and how many jobs each candidate would “create” with his economic policies.

But let’s ignore for the moment the stark fact that a president has no legal standing to meddle in our free market economy. Even if it is illegal, is it at least a good idea? Recent history would indicate that the answer to that question is a definitive “no.”

Let’s look at the current sub-prime mortgage crisis, for example. A little study of the situation reveals that sub-prime mortgages, which are mortgages issued to potential home buyers with credit scores too low to allow them to qualify for traditional mortgages, were first made possible in the 1980s largely thanks to the efforts of your federal government.

Back then the government passed some laws that were designed to make it easier for low income Americans to purchase homes. In order to make the prospect of exposing themselves to higher risk more attractive to lenders, the laws eliminated interest rate ceilings and permitted the use of variable interest rates. That created a market for lenders who were willing to offer mortgages to a whole new class of people, if those people were willing to accept (or uneducated enough to understand) the risks involved with variable interest rates.

In the 1990s the sub prime market soared and, indeed, people who could have never afforded a new home under the traditional mortgage scenario became proud homeowners with the help of sub prime lenders. Initial interest rates were low, and down payments were minimal. Times were good.

Then reality made its inevitable appearance on the scene. Variable interest rates began to climb while home values dropped precipitously. Many of the unfortunate home owners who took advantage of the sub prime offers could not cover their ballooning payments, but they were also unable to sell their homes for what they owed on them. Foreclosure rates began to soar, and they are climbing still.

And the seeds of the whole disaster were planted in the government’s desire to “manage the economy” such that low income Americans could qualify for loans to buy a house. Good intentions, bad results. Now panic has set in, and we have presidential candidates telling us how they are going to “fix” the sub prime disaster, likely with more government regulation and taxpayer-financed bailouts.

Ronald Reagan once said that the scariest words in the English language are “I’m from the government, and I’m here to help.” Unfortunately, not many of us have the good sense to fear those words anymore, especially when they come from the mouth of a slickly packaged presidential candidate.