Monday, April 9, 2012

The Real Causes of the Financial Crisis

Here is an excellent article for those who think that the 2008 financial crisis was caused by deregulation and free market capitalism:

The Real Causes of the Financial Crisis by John Allison.

Basically, he is blaming FDIC insurance and super low interest rates from the Fed.

Though that is not the entire story. For those who want to blame government meddling for the crisis, we have a target rich environment.

CRA, Fannie Mae and Freddie Mac, SEC creating ratings agency monopolies, HUD, local land use restrictions, a vast array of regulations on real estate, banking, and the rest of the economy.

There is a wealth of other links out there for more information on the subject:

Welcome to Moral Hazard by Daniel Henninger

The Housing Boom and Bust by Thomas Sowell

The Myth that Laissez Faire is Responsible for our Financial Crisis by George Reisman

The way I look at it, the government interventions that contributed to the crisis are so massive, they are the elephant in the room. They are obvious, on public record, undeniable, and clearly violate free markets, yet those who want to blame capitalism have no choice but pretend they don't exist.

And it is an elephant in another way. Like in the story of the elephant and the blind men, it is so massive that not everyone who defends free market ideas and blames government interference can see it all. Understanding the whole thing requires reading a vast number of different economists and economic journalists. Thomas Sowell lets us know about how land use restrictions drove up housing prices in a few locations like California, causing a problem that people like Bill Clinton saw as national, requiring government assistance so people can buy homes in a high priced market. Austrian economists like George Reisman inform us of the fed's role in lowering interest rates and supplying the liquidity to inflate the bubble. Others point to the SEC requiring investment banks to use ratings agencies to buy derivatives, but only certifying three, creating a monopoly.

Government intervention into the housing and finance industries was so pervasive, massive, multifaceted, and influential that there is plenty of room for debate about what were the most important causes of the crisis, how much each of these interventions contributed. But there is no rational way to blame the free market.

The free market, as usual, has an alibi. It wasn't there!

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