Anyone who says they know exactly what went wrong with the current crisis and exactly how it should have been done is full of it, IMO. I think it will be years before all the facts have been digested enough to get a good idea of what really happened.
One inconvenient discussion the article leaves out is anything related to this:
"8. The critical deregulatory mistake was allowing excess leverage. Many deregulations get blamed but in fact contributed little to the problem."
They mention it with fannie and freddy, but don't mention it at all with regards to the big investment banks, which got an ok from the SEC to increase their leverage.
I don't doubt that bad regulations played a role in the problems, but attributing all the problems to the government strikes me as being simplistic, and an argument based more on faith than facts. Which was my original point about reason.com.
Anyone who says they know exactly what went wrong with the current crisis and exactly how it should have been done is full of it, IMO.
This is the kind of rule that works until it doesn't. Seems better just to judge each explanation (of this or anything else for that matter) on its merits. And the place to start is with some specific thing the article says that you believe is false.
People are still debating the great depression, for that matter, so my expectations are that any debate here will simply go the way of typical libertarians vs the rest discussions that one finds all over the internet, rather than adding anything particularly new or interesting. There is a lot that we don't know - who knows what sorts of information will come out over the years from people like Paulson, Bernanke, those at the helm at Bear, Lehman, AIG, and so on. We're still in the middle of this and won't see the end of it for a while, so I really don't think we know enough to draw accurate conclusions. The fact that it's even a recession was only officially declared last week.
That said, I think the problem with the article is one of omission: he points out some regulatory issues, but is blind to the fact that the market screwed up in a lot of ways too:
* He barely mentions the ratings agencies, and how badly they got things wrong, the fact that they were being paid by the same people whose risk they had to rate, and some of what has emerged about how they operated.
* He seems to gloss over the fact that securitizing mortgages without a requirement for whoever is selling on the mortgage to keep some 'skin in the game' is a recipe for market failure.
* He only mentions excessive leverage for Fannie and Freddie. Not even discussing that for banks is indicative that he's simply out to push his point, rather than take a broad, ideologically neutral look at what went wrong.
* He talks about temporary easing of capital requirements. Libertarians like to point out that once the government gains some power, it's hard to get it back. I think the reverse is often true as well - 'temporary' measures become permanent due to lobbying and pressure not to let anyone fail. Perhaps it might have helped, though, but how and when to make those measures go away is a complicated subject in its own right.
* In terms of the bailout, it certainly appears that there are lots of dodgy aspects to it, but it's not like you can back up and run these things 10 different ways to see what works best. I think some of his criticism is sound, but perhaps other approaches would have been worse - it's simply impossible to say. Doing nothing (the real "keep the government out of it" plan) wasn't really an option due to the systemic risk.
* I do agree with his hope that we don't overregulate, but don't think we should fight any regulation, just look for sensible things that will 1) continue to allow financial innovation, but 2) patch up some of the problems with this round of things, and attempt to make future bubbles and busts a bit less drastic. They'll happen just the same, but I view people as basically "muddling through" in terms of the economy. It's too big and complex and vulnerable to new ideas and irrational exuberance to either regulate away all problems (at least without killing off a lot of what's good), and at the same time I don't believe in throwing up our hands in the air and saying "oh, the free market will take care of everything" - there are plenty of ways the market can fail, too.
>>which got an ok from the SEC to increase their leverage.
Agreed. But it isn't "deregulation" to give only the 5 largest investment banks (which were systemically important) an exemption to leverage rules governing all other banks -- that's regulatory corruption.
Also, the private i-banks levered up to 30-1, but fannie and freddie went to 130-1 (they may be actually be more leveraged now that they are under government control). And the Federal Reserve is levered over 55-1 today.
> Anyone who says they know exactly what went wrong with the current crisis
The primary cause boils down to monetary policy. Financial panics are not new. There have been many, and they were all caused by credit bubbles. Regulatory details and the exact nature of the scams run during the bubble are quite secondary.
I have heard this a lot, and I'd like the other side to chime in: have there been any bubbles that happened while interest rates and the money supply were generally decreasing? Lots of people dismiss your view, but such a bubble would be strong evidence that they're actually right.
The best thing I've seen so far is this:
http://www.marginalrevolution.com/marginalrevolution/2008/10...
One inconvenient discussion the article leaves out is anything related to this:
"8. The critical deregulatory mistake was allowing excess leverage. Many deregulations get blamed but in fact contributed little to the problem."
They mention it with fannie and freddy, but don't mention it at all with regards to the big investment banks, which got an ok from the SEC to increase their leverage.
I don't doubt that bad regulations played a role in the problems, but attributing all the problems to the government strikes me as being simplistic, and an argument based more on faith than facts. Which was my original point about reason.com.