This year’s Democratic presidential candidates seem poised to repeat the mistakes of the past. Hillary Clinton, for example, wants Washington to impose a five year freeze on adjustable-rate mortgages and provide $5 billion to help troubled homeowners. But that would only prolong the economic suffering. As painful as it may be, loans that are bad must be allowed to fail. If capitalism’s going to work, people must be responsible for their bad decisions.The same thing should be true, by the way, for big companies. Lawmakers and the Bush administration must allow credit markets to locate and deal with bad loans on their own. That’s the only way to allow Wall Street bankers to back away from their failed investment strategies without causing a panic or rewarding bad behavior.
Federal interventions, after all, often backfire. “In trying to calm financial markets, the Fed has spewed out enormous amounts of money and credit that have depressed the dollar’s exchange rate and could aggravate inflation,” Washington Post columnist Robert Samuelson wrote recently. “The effort to fix one problem may lead to others.”
Indeed, the weak dollar is a major problem. One reason gas prices are so high is that oil is priced in dollars, so as the greenback loses value, oil becomes more expensive. In the long run, high gas prices will harm the economy by driving up the cost of just about everything.
Our economic picture, of course, isn’t bleak. The U.S. has an efficient, well-educated workforce, unemployment is low and our standard of living is high.
So while it’s difficult for politicians to accept the wisdom of leaving markets alone to work on their own, that’s exactly what they should do. Instead of trying to protect us from every blip, Washington should be willing to “Not just do something. Stand there.”