Legislating Trends

Should policy itself be considered a systemic risk?

Peter Wallison: Sure.  It is.  And we always have to balance these things.  We have to look at our regulation, not only for the good that it might do when we are facing a question of moral hazard, or risk by companies that the government is backing, say banks; we have to also realize that anytime we impose regulation, we are creating moral hazard becaue the people assume that whenthe government is regulating a company, that company is gong to be taking fewer risks.  So, anytime the government gets involved with private sector activity, with economic activity, there is going to be a distortion of the market that can cause a problem.  And so, public policy can be the source of enormous problems and that's why I suggested earlier, that the only thing we really have to do to provent another financial crisis of the kind we have just gone through is to get the government out of the housing business.  Because the government there was following a public policy which was to increase homeownership.  It's a good idea to increase homeownership, but not by distoring the financial system in order to achieve it.  And by creating Fannie Mae and Freddie Mac, by giving them an obligation to increase homeownership, they were obviously distoring the financial system. 

Recorded on December 21, 2009

Anytime the government gets involved with private sector activity, with economic activity, there is going to be a distortion of the market that can cause a problem.

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