The campaign to turn the current economic turmoil into justifications for new invasive federal government intervention in the marketplace is in full swing. The Hill reports, “After Bear Stearns bailout, Dems renew push to help homeowners,” and E.J. Dionne comments: “Never do I want to hear again from my conservative friends about … how government should keep its hands off the private economy. … The Wall Street titans have turned into a bunch of welfare clients. They are desperate to be bailed out by government from their own incompetence, and from the deregulatory regime for which they lobbied so hard.”

First of all, Dionne is simply wrong on the facts. In no way can the Federal Reserve’s loan to J.P. Morgan to help buy Bear Stearns be considered a bailout. Bear Stearns shares were worth $160 a year ago and went for $2 in the J.P. Morgan acquisition. Employees who had heavily invested in their employer had their life savings wiped out. Perhaps Dionne can explain to these employees why they should feel bailed out. Husbanding the J.P. Morgan deal was a proper use of Fed power to keep markets flowing by preventing what would have been a very disruptive bankruptcy proceeding.

Furthermore, government intervention in the mortgage market is one of the causes of the current financial troubles. As the Wall Street Journal reports: “The problems are rooted in a bipartisan goal to figure out ways for lower-income Americans to buy homes, so that they could build financial wealth and plant deep stakes in their neighborhoods.” Instead of figuring out new ways the government can add uncertainty to the housing market, the federal government should be encouraging private sector and local government efforts to improve market transparency.

The President’s Working Group on Financial Markets report does just that. First it calls for credit agencies to improve the way they grade securities. Specifically, credit raters should develop and then explain different ways to grade traditional securities and the structured credit products at the heart of the current troubles. Credit agencies ought to disclose the underlying assumptions used to calculate the risk in the new structured credit products. Many of these reforms are already being implemented by the private sector, but a private-sector working group with representatives throughout the industry could help set uniform standards.

Another problem at the heart of the subprime mess is the bad loans made to families who can not afford them. Local governments should look to increase their oversight and licensing of mortgage brokers, many of whom are currently unsupervised. Finally, the Federal Reserve could issue stronger consumer-protection rules that include better disclosure of how affordable different types of mortgages will be in different situations.

Whenever something goes wrong in America, the instinct of the Washington establishment is to “do something.” The Fed’s recent actions are productive along these lines, but Congress needs to realize they are not best equipped to help. Instead of adding new laws that can only add uncertainty to troubled markets, Congress should concentrate on its traditional role of setting spending and taxing priorities.

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