With the feds poised to 'do' something, get ready for a rough ride

Crises are lousy environments for maintaining freedom. The sad fact is that, when people are scared, broke and in need, they lose patience for talk about legal guarantees, free speech and privacy. When faced with what seems like on-coming doom, people want somebody -- usually government officials playing at mommy and daddy -- to make the scary monster go away. As Washington Post columnist Robert Samuelson writes in a discussion of current financial turmoil, "Americans often delude themselves that all problems can be 'solved' if only government would act 'boldly.' This may be another example."

And since government officials can't make every problem go away -- and are often remarkably badly suited to even try -- the problem continues or worsens, spawning calls for more action and more power for the state. Inevitably, protections for liberty get battered and the sphere in which people can conduct their lives by right, without having to ask permission, contracts.

Governments make problems worse?

Congressman Ron Paul, who serves on the House Financial Services Committee, points out that the housing crisis, which sparked the financial meltdown, had its roots in earlier government interventions.

Ever since the 1930s, the federal government has involved itself deeply in housing policy and developed numerous programs to encourage homebuilding and homeownership.

Government-sponsored enterprises Fannie Mae and Freddie Mac were able to obtain a monopoly position in the mortgage market, especially the mortgage-backed securities market, because of the advantages bestowed upon them by the federal government.

Laws passed by Congress such as the Community Reinvestment Act required banks to make loans to previously underserved segments of their communities, thus forcing banks to lend to people who normally would be rejected as bad credit risks.

These governmental measures, combined with the Federal Reserve's loose monetary policy, led to an unsustainable housing boom. The key measure by which the Fed caused this boom was through the manipulation of interest rates, and the open market operations that accompany this lowering.

And now the government is going to fix what it has wrought, but this time, it will get it right. Right?

That's all economic policy, but government responses to crises have serious civil liberties implications -- freedom is really indivisible. When first Herbert Hoover and then Franklin Delano Roosevelt responded to the Depression with a flurry of interventionist policies, the laws they pushed through had teeth. The Schechters, for instance, a family of kosher butchers, were infamously fined $7,425 (a small fortune at the time) and sentenced to between one and three months behind bars for setting the prices of their chickens too low.

The Schechters ultimately prevailed in their case, overturning onerous government regulations.But one of the brothers noted after the fact that the "victory" ruined his family's finances.

Journalist and former FDR supporter John T. Flynn wrote in The Roosevelt Myth:

The NRA was discovering it could not enforce its rules. Black markets grew up. Only the most violent police methods could procure enforcement. In Sidney Hillman’s garment industry the code authority employed enforcement police. They roamed through the garment district like storm troopers. They could enter a man’s factory, send him out, line up his employees, subject them to minute interrogation, take over his books on the instant. Night work was forbidden. Flying squadrons of these private coat-and-suit police went through the district at night, battering down doors with axes looking for men who were committing the crime of sewing together a pair of pants at night. But without these harsh methods many code authorities said there could be no compliance because the public was not back of it.

There's no point in making laws if you're not going to enforce them, and enforcement can be a very rough business.

Right now, we're not looking at anything approaching the scope or intrusiveness of the New Deal, but we are looking at a rush to approve a bailout that will cost hundreds of billions of dollars. That massive commitment of taxpayer dollars means the government will be even more dependent than ever on a steady and copious flow of revenue in the years to come. If you think the Internal Revenue Service has been aggressive in the past, just wait to see what it has in store for you in the tax seasons to come.

No crisis is complete without scapegoats. Already, the FBI is probing the companies tagged to receive taxpayer largesse for acts of fraud. Even before the latest developments, 1,400 individual real estate lenders, brokers and appraisers were under investigation. Did people among these unlucky suspects commit crimes? Quite possibly. But whether or not they did, somebody is going to wear handcuffs on the evening news. Passions have been stirred to a level that would be inconceivable if these companies were simply forced to suffer the consequences of their own bad financial decisions. Heads must roll.

And new regulations are on the way -- also likely to be considered and approved in an emotional rush. Whether or not they make economic sense (I doubt they will), they'll further intertwine government into people's lives and livelihoods, leaving even less space beyond the reach of the state.

As I said, crises -- real and imagined -- are bad times for preserving liberty. Get ready for a rough ride.