Letter to the Editor

Regulations cannot eliminate risk

Monday, September 29, 2008

To the editor:

The term "creative destruction" was coined by Joseph Schumpeter for his seminal work on capitalism. It is a concept that should be applied to today's misfortunes in the financial markets. Older, nonviable institutions need to be replaced by innovative ones.

More regulations will not prevent bubbles in capitalism. In fact, it is the existing complex regulations created by congressional Democrats for the banking and investment industries that make such bubbles possible.

Congress made both Fannie Mae (created in 1938) and Freddie Mac (1970) into government-sponsored enterprise vehicles. As such, the politicians were running them -- into the ground -- which makes as much sense as letting health-insurance providers dispense medical advice. (Of course, that is exactly what is happening in medicine today.)

During the Clinton years, in the desire to increase homeownership and to secure votes, bureaucrats used the Carter-era Community Investment Act to force lenders to accommodate borrowers with bad or nonexistent loan histories. These bureaucrats were able to steer what should have been market-based decisions into political ones. And it is this symbiosis between government and business that made the federal funds market so huge that some say it accounted for 80 percent of all existing home loans.

No law, regulation, politician or bureaucrat can take all the risk out of the marketplace. The sooner we realize this, the sooner we will see the end of faux fixes that only exacerbate the problem.

EMILY MELLIES, Cape Girardeau