Beware: George Soros and his influential friends are coming to repair the economy

One should never stand in awe of academicians or economists, no matter how big their names or reputations.

The following quotations underscore the need for skepticism:

"Large swaths of economics are going to have to be rethought on the basis of what's happened." So said Larry Summers, President Obama's chief economic adviser, in an interview in the weeks after the markets crashed a year ago."

"Now financier George Soros is announcing a $50 million effort to speed things along," Michael Hirsch writes in Newsweek. "This week Soros is gathering some of the leading practitioners of the market-skeptic school, who were marginalized during the era of "free-market fundamentalism," among them Nobelists Joseph Stiglitz, George Akerlof, Michael Spence, and Sir James Mirrlees. He's also creating an "Institute for New Economic Thinking" to make research grants, convene symposiums, and establish a journal, all in an effort to take back the economics profession from the champions of free-market zealotry who have dominated it for decades, and to correct the failures of decades of market deregulation. Soros hopes matching funds will bring the total endowment up to $200 million.

"Economics has failed not only to predict and explain what happened but has also failed to protect society," says Robert Johnson, a former managing director at Soros Fund Management, who will direct the new institute. "That's what the crisis revealed. The paradigm has failed. There is no guidance."

None of this bears any resemblance to what actually brought down the economy. This is understandable. Larry Summers and George Soros are Democrats who are intent on building up government's role in the economy.

All of them presumably carry in their heads a century old liberal paradigm, born at the same time as modern industrial capitalism,  that assigns members of modern societies to three groups:

First, there are the ordinary folks who cling to their bibles and guns and work hard to improve their lot in life. Unfortunately, to the liberal mind, they do not grasp what is really in their best self-interest, are politically weak and easily misled.

Second, there is the establishment, which comprises the rich, successful
buseiness proprietors and corporate executives and financiers. These are the folks who are commonly said to run the country. Liberals regard them as ruthless exploiters in search of personal gain and little else.

And then, in the words of John Steele Gordon, "there is the third group, those few, those happy few, that band of brothers, the educated and enlightened liberals, who understand what is really going on and want to help the members of the first group to live a better and more satisfying life. Unlike the establishment, which supposedly cares only for itself, liberals supposedly care for society as a whole and have no personal self-interest."

So, now we have a band of brothers made up of George Soros, Larry Summers, Joseph Stiglitz, Michael Pence, George Akerhof, and Sir James Mirrlees. They undoubtedly will fashion a reprise that will cast full blame for the collapse on ruthless, self-interested financiers while holding government blameless. After all, they can work their magic only if they bend public and political opinion to their conclusions.

They need government to translate their personal opinions into the law of the land.

An antidote is in order.

An unbiased explanation for the ecoonomic collapse would lead inevitably to the conclusion that free markets have not existed in the United States for a very long time.

The housing market was, in fact, deliberately destroyed by heavy-handed government starting in the 1970s, when courts and the armies of compassion forged an alliance, later joined by Republican, as well as Democrat, administrations.

It started with a court order requiring an end to redlining, a practice that made it difficult, if not impossible, for residents of some inner city neighborhoods to get mortgages. The Carter administration responded with the Community Reinvestment Act, which made redlining illegal and required inner-city lending.

Over the years, the minimum lending levels grew, which meant that more and more high-risk mortgages were granted. Under President George W. Bush, usage of the reinvestment act grew sharply. In effect, Bush used the cover of law to move left, broadening his appeal to voters outside the conservative and Republican folds.

In its first modern push to expand home ownership, Congress in 1970 created Freddie Mac, a companion to Fannie Mae, which dates to the Great Depression. Both were instrumental in wrecking a housing market discipline that had endured for 200 years.

Traditionally, a bank or savings and loan would accept a mortgage application, assess the financial condition of the applicant, then grant or deny a mortgage.

Under the new regime, a local bank no longer had to worry about an applicant's finances. The bank would hold the mortgage for hours or days, then unload it to Fannie or Freddie. They no longer had any skin in the game and could increase their profits by being more and more reckless.

Risk, previously the biggest factor in any business transaction, now had legs, and was no longer a factor in mortgages.

Fannie and Freddie bundled mortgages of varied risk levels and sold them to investment banks, which bundled the bundles and sold them as big-ticket securities all over the world.

With investment money pouring in from everywhere, the U.S. housing market boomed. Then, when the economy softened and the defaults started, the economy collapsed.

Now, some giants of economics and finance, such as Stiglitz and Soros, are pointing the finger of blame at free markets, which the founders took pains to establish in the U.S. constitution, and deregulation of markets.

In essence, they are blaming the victim for failing to withstand the blows of the powerful government mugger while excusing the ACORN thugs, the armies of compassion and the political geniuses who systematically destroyed a free market sytem that had exercised discipline over the mortgage process for two centuries.

Former Federal Reserve Chairman Alan Greenspan issued a semi-apology a year ago for a Federal Reserve policy that had held interest rates too low for too long, contributing to the housing market bubble..

He attributeed the “mistake” to his belief that banks, operating in their own self-interest, would do what was necessary to protect their business and its shareholders. Greenspan called that “a flaw in the model ... that defines how the world works.”

In other words, Greenspan admitted participating in a prolonged stimulation of the housing market, then blamed the market for failing to withstand the government intrusion and carry on its gatekeeping function.

Greenspan did not mention, and congressional inquisitors failed to ask, about ACORN thugs who picketed local banks and browbeat bankers who failed to comply quickly with their lending demands.

The founders would not be pleased by the governmental quackery that has badly damaged their careful construct.