Humans need someone to blame. Scapegoating, no matter how irrational, focuses anxiety and frustration into something concrete and thereby allows a modicum of healing. To this day, Bostonians blame Bill Buckner for blowing their 1986 World Series, despite the obvious fact that his one mishandled grounder was just one of hundreds of plays throughout their lost series. The irrational piling on shields their psyches from paralyzing self doubt. On the other hand, scapegoating Mr. Buckner may have prevented rational introspection and contributed to Boston’s subsequent 18 year drought.

Scapegoating is by no means solely a sports phenomenon. In 1989, a group of four Democrat Senators, plus one Republican named John McCain, were accused of causing the savings and loan disaster through shady dealings with Charles Keating. The “Keating Five’s” alleged misdeeds might have contributed to a few billion dollars in bank losses, but the S&L crisis totaled $160 billion. Despite the drumbeat of greed and corruption stories, the reality of the S&L crisis was that the industry was structurally flawed by its regulatory mandate. S&L’s took deposits from and made loans exclusively to their respective communities, thereby inappropriately concentrating risk and assuring an eventual collapse. The scapegoat instinct blocked any effort to understand the mess.

More recently, the telecom crash that took down companies such as Qwest and Worldcom was blamed on the dishonesty of a few scapegoats. Joe Naccio, Qwest’s scapegoat, was directly responsible for at most $8bln of the over $80 bln collapse in Qwest’s market value. Likewise Worldcom’s Bernard Ebbers committed a $20 bln accounting scam that contributed to a $167 bln collapse. Both Naccio and Ebbers are crooks, but their crimes did not cause the downfall of Qwest and Worldcom. Both companies were houses of cards, built on unrealistic marketing assumptions; their collapses were inevitable. Blaming their CEO’s eases the psychological wounds of those who lost their investments, but it does not advance understanding of why the losses occurred.

Today, media and politicians are desperate to blame something for the recession. Naturally, the mainstream media and the Democrats are blaming corporate greed and excess. Rep. Barney Frank, one of the chief architects of the collapse of Fanny Mae, has singled out corporate jets and executive bonuses as his scapegoat. He has demanded that the jets be grounded and top executives give up their bonuses. While it is grating to see executives enjoy such perquisites while receiving bailouts, the cost of jets and bonuses amounts to perhaps 1/1000 of the overall problem.

President Elect Obama has taken to blaming the past in order to make his future more palatable. He has talked down the economy for months in a effort to cast blame on the Bush administration. Most recently, he has stated that the recession could last for years, in a preemptive effort to blame Bush in the unlikely event the downturn really does last that long. The worse the economy seems now, the better it will seem in a few months when Obama is in charge. Bill Clinton pulled the same trick in 1992 by declaring that year’s mild recession the worst economy since the great depression. The economy was in a boom cycle before he took office.

Keeping with the spirit, this blog’s scapegoat for the current economic mess is: government meddling in the marketplace. Recessions are an unfortunate, but natural economic event. The traditional Austrian Business Cycle predicts that periodic downturns are inevitable. Far from a catastrophe, recessions are a natural means of redirecting capital to more productive and efficient companies. The harsh justice of allowing inefficient companies to fail during a downturn is also the seed of future growth and prosperity.

Of course the government is against letting its pet companies fail: the Detroit three, Amtrak, big banks, domestic steel, large agriculture corporations, etc. The government has propped up these and countless other companies for decades. The government has spent hundreds of billions of dollars in tax credits to avert recessions over the past few years. The government has made money cheap to borrow for over a decade in an effort to fine tune the economy to its liking.

Usually when an industry enters a downturn, at least one other industry fares well as a balance to the economic drag. This time the government has propped up so many industries for so long, it has nearly run out of levers to pull. Seemingly every sector is in trouble now. By meddling to delay recession, the government has only made the inevitable recession worse.

Contrary to doomsday reports, the US’s best days are not behind it. Times will get better, probably much sooner than Obama’s dour prediction of years into the future. When the smoke clears, smart voters should not indulge in scapegoating the shady characters that inevitably surface during a crisis. Instead, smart voters should consider the wisdom of fine tuning the economy. Smart voters should question delaying a recession at all costs. When Obama’s doomed Keynesian spending orgy eventually dries up, perhaps someone will again take up the mantle of limited government and free markets.

As Congress convenes this week, expect its Democrat leaders to plead their case that the financial meltdown of 2008 was all Bush’s fault. He deregulated financial markets; he failed to heed warnings about the impending disaster; he was a shill for corporate greed.

Political memo to Sen. Reid: blaming Bush is a losing strategy. First off, none of the common accusations is true. Bush did not deregulate anything. In fact he enacted one of the most sweeping corporate accountability laws ever, which apparently did not help. Bush actually proposed year after year to reign in government guaranteed mortgage entities that over levered the middle class, but his requests fell on deaf ears. Finally, the Bush administration was actually hyper aggressive in its pursuit of corporate wrongdoers like Bernie Ebbers, Jeffrey Skilling, and the partners of Arthur Andersen. Any effort to hang a disproportionate amount of blame on Bush is a short term tactic at best. As Reid’s smokescreen lifts, the Democrats culpable for propping up Fannie Mae to the very end will only look more guilty.

Still, since this is blame season, this blog wishes to add a new entry to the long list of contributors to the 2008 meltdown: the US Tax Code, which forces corporations to assume excessive risk. Because debt is favored by the Tax Code over equity financing, companies, especially financial ones, must take on excessive risk to be competitive.

Risk, for the purpose of the 2008 meltdown, is the chance that a company will fail due to its inability to service its debts. JP Morgan invented a common risk measurement tool, called Value At Risk (VAR), that basically says “we expect to lose no more than X dollars 99% of the time,” where X is the VAR. As the fourth quarter of 2008 has demonstrated, the circumstances of the remaining 1% do eventually come to pass, and corporations can be on the hook for much more than their VAR. Too much debt compounds the damage when losses exceed the VAR. On the other hand, equity financed entities are better equipped to ride out unusually bad economic weather.

Why did companies like Lehman finance their operations with so much debt when any simple analysis would show an exposure to disaster? The US Tax code forced them to do so in order to be competitive with their peers. Unlike equity financing, debt financing is tax deductible. Uncle Sam pays for about one third of a corporation’s interest expense (the cost of debt financing). Dividends (the cost of equity financing) are not supported by tax incentives. Therefore, a company that finances its operations through equity will suffer a cost disadvantage to its peer who uses debt.

In order to be cost competitive in the short term, companies must assume as much debt as possible because of this twist in the Tax Code. Indeed, the ever quickening race to the bottom by such companies as Lehman was partly fueled by the Tax Code favoritism of debt over equity financing. This imbalance that rewards excessive risk taking can be addressed in several ways:

First, Congress can make equity investment competitive with debt by making preferred share dividends fully tax deductible and on a par with interest expense. That would give companies an attractive, lower risk means of financing their operations. Since failure to pay a preferred share dividend is not a cause for bankruptcy, the worst case scenario becomes considerably less dire.

Second, Congress can dramatically reduce the corporate tax rate. Part of the incentive for excessive debt is due to the 34% corporate tax rate, among the highest in the world. If the rate were cut in half, the debt incentive would also be cut in half. If the corporate tax were eliminated, as it should be, debt and equity would be on an even footing.

So, add government interference in the market to the causes of the financial collapse of 2008. Not only did the US Government encourage cheap debt, it discouraged less risky financing options. Add that to implicit guarantees for questionable mortgage securities, social programs that demanded issuing risky loans, omnipresent lobbying of Congress by the very entities feeding on these programs, and the Government stands tall as the chief villain in this tragedy.