The motives of those who call for new government interventions into the economy have more to do with moral sentiments than economic analysis. They want government to serve the people by thwarting the predations brought on by the "hubris" and an "overt lack of concern" for others among "corporate leaders," to use the words of Sen. Jim Webb (D-Va.).
One problem with this populist morality play is that it can't tell us anything useful about specific economic problems. Blaming the oil companies' greed for high gas prices, for instance, assumes a cause-and-effect relationship that violates a basic rule of science: You can't use a constant (greed) to explain a variable (gas prices). The only way to make the accusation stick is to say that greed, somehow, is also a variable. The energy industry's chief executives went through an exceptionally greedy phase earlier this year and crude oil prices skyrocketed. In recent days, however, they've been waking up feeling about 15% less greedy, and prices have receded.
The other problem is that "serve the people" is a noble sentiment but an imprecise marching order. The next wave of government regulations that follow from it will be guided by a principle no more exacting than, "Let's give this a try and hope it works." The resulting adhocracy is likely to saddle the country with policies it may regret.
Indeed, government policies to correct the market are often, in reality, correcting the last round of government interventions in the market. Fannie Mae and Freddie Mac, for instance, were set up by Congress in 1968 and 1970, respectively, as "government-sponsored enterprises" with a mandate to increase home ownership. Both are corporations owned by shareholders, but, as government-sponsored enterprises, they are exempt from taxes that ordinary corporations must pay, and they do not have to comply with accounting standards that govern other companies. Above all, the implicit but universal understanding in the world's capital markets that the U.S. government would bail them out if helping home buyers led to some excessive risk-taking has produced Freddie's and Fannie's current financial woes.
Last week, the House passed a bill that would greatly increase the level of government intervention in the market. Among other things, it would make the government's bailout guarantee explicit, authorize the government to lend Freddie and Fannie money and buy their stock, and create a tough regulatory agency to keep an eye on their business practices.
