ByLeon Louw
Executive Director,
Free Market Foundation and Law Review Project
Thursday, 16 October 2008
Leon Louw said at the launch of the DVD of Habits of Highly Effective
Countries, Lessons for South Africa that it could not come at a more
opportune time than during the twin crises: the global financial crisis
and the domestic political crisis.
“It is,” he said, “more important than ever for policy-makers to learn from the world’s experience and ignore the extraordinary degree of nonsense and confusion monopolising the discourse here and abroad.”
The original publication has sparked interest in other countries. Editions have been produced for India and China, and others will follow in various African countries. Sponsors are considering editions for up to 150 countries.
“That anyone should regard the subprime crisis as ‘market failure’ and a justification for increased intervention, is truly bizarre,” according to Louw. “Firstly, the world’s richest countries have enjoyed history’s highest living standards and the longest period of sustained growth and stability because of the pro-market policy revolution of recent decades. The increase in economic freedom in Africa saw it go from the only region where the average person got poorer for a generation to having the world’s highest regional growth rate.”
"Secondly, poor countries are not thought of as having ‘crises’ simply because they have perpetual destitution. When the rich get richer slower its called a ‘crisis’; the poor getting richer is so rare it’s called an ‘economic miracle’. “
“Thirdly, and most importantly, government intervention is the cause not the solution of the subprime crisis elsewhere and the supraprime crisis here.”
Louw addressed the anomaly that everyone knows what caused the crisis, yet no one mentions it. “The reason,” he explained, “is that the principal culprits Fannie Mae and Freddie Mac, are sacred cows as natural to Americans as the Rockies. Few Americans have the guts to expose them as the dark socialist underbelly of American ‘capitalism’. It takes a bold American to confess to such obscene socialism by admitting that they should never have been created and should now be jettisoned. That Fannie and Freddie (F&F) are GSEs says it all. ‘GSE’ stands for Government Sponsored Enterprise. The sole purpose of these and lesser-known GSEs, along with various anti-market laws, was to subvert free market forces by bullying and seducing banks into making subprime loans on an unimaginable scale. Decades of the government underwriting these toxic mortgages was followed by nominal privatisation and formal withdrawal of guarantees, which was as phoney as our government saying it doesn’t guar antee the debts of our parastatals. They became know as ‘implicitly’ guaranteed. F&F paid banks in full for subprime mortgages, thus eliminating risk to reckless lenders, bundled (‘securitized’) what they bought, and sold these ‘securities’ to unsuspecting ‘secondary market’ investors worldwide.”
“Where F&F were not underwriting subprime mortgages, banks were forced by the Community Reinvestment Act to do so. These interventions set the ball rolling and it gathered size and momentum driving housing prices into a giant bubble which analysts knew had to burst. When prices fell below outstanding balances, markets panicked, perhaps prematurely, because debt exceeded security.”
“That the market is now blamed for this deliberate and massive subversion of the market by the government is perverse in the extreme. That the crisis is seen as an event rather than a prolonged process is perplexing. It is based on the speculation that a large proportion of subprime mortgages will be foreclosed due to debtor delinquency. It may be too soon to panic – actual foreclosures and sales in execution below the value of outstanding debt, though up four-fold on 2005, are still below one percent of all mortgages. Hence my proposal, now being considered by policy-makers in Washington, that there be no bail-out at all, and the government arrange instead with private insurers to underwrite a share of actual losses if and when they occur over the remaining lifetime of all subprime mortgages. That will:
· stabilise markets immediately,
· save most institutions holding toxic mortgages,
· lighten the rescue burden and stretch it over many years,
· eliminate the perceived need for crisis intervention,
· get house prices rising towards levels where they exceed
outstanding balances, and
· preserve market freedom and integrity.”
“The legacy of market-free intervention needs a free market solution. It does not need more of the meddlesome medicine that made the patient sick in the first place”, concluded Louw.
Habits is the culmination of three years of analysis of the characteristics of the world’s winners and losers. It isolates the areas
where South Africa’s scores are much better or worse than those of the world’s winners and losers.
Louw suggests that by “avoiding policies that characterise losers and
emulating winners will place South Africa on the road to enduring and sustainable prosperity and stability regardless of the global crisis”. In his view, “The two great lessons to be learnt from the global crisis are:
1. Discontinue policies that distort credit markets by forcing
credit-providers to finance people who aren’t credit-worthy, as they did in America, or forcing them not to finance people who are, as we do in South Africa.
2. Don’t try solving problems caused by government intervention with more government intervention, just discontinue the cause.”
Turning to the political crisis in South Africa’s ruling party, his view
is that “It may be as good for South Africa as it is challenging for the ANC. What matters for the country is not which faction runs the ANC or any other party, but what policies they implement. The Habits DVD will be distributed to all key role-players. It should leave them in no doubt about which policies to implement, regardless of who triumphs politically. It does not carry an ideological message, but presents non-contestable facts drawn from statistical analysis of universally recognised data.”
“Whilst anguishing about the gravity and complexity of political
challenges facing the country and the party, we can delight in our
historic transition from a fledgling democracy to a mature one where
voters realise that they are free to change governments by ballot instead of bullet. Traumatic though the transition might be in the short-term, it is hard to think of anything more important for the long-term health of our democracy. We should expect some misdirected policies during the malaise, which is why it is opportune for this DVD to inject the common sense lessons to be learned from the world’s winners and losers into the policy-making process.”
“Hopefully whoever governs will appreciate what was accomplished by the ANC adopting pro-market policies.” A graph in the DVD shows how changes in economic freedom coincided with changes in economic growth since the 1970s.
The facts presented in the DVD suggest that we should:
· sustain and increase our substantial lead over the world’s top
20 performers regarding:
Ø the rule of law,
Ø foreign trade liberalisation,
Ø business liberalisation,
Ø banking liberalisation and
Ø financial market liberalisation,
· and close the gap regarding:
Ø 1. crime;
Ø 2. exchange control;
Ø 3. time spent with bureaucracy,
Ø 4. centralised bargaining and
Ø 5. excessive spending on economic regulation and parastatals.
The DVD and the book are available from The Free Market Foundation at R100
and R50 respectively.
For more information or comment contact Leon Louw (+27-84-618-0348;
+27-11-884-0270) or Gail Daus van Wyk (+27-11-884-0270).