
Government policy triggered the financial meltdown and will almost certainly extend it. - robg
http://www.reason.com/news/show/130330.html
======
krschultz
I love this part:

You can't lend money if you don't have it. And beginning in 2001, the Federal
Reserve made sure lots of people had it. In January 2001, when President Bush
took office, the federal funds rate, the key benchmark for all interest rates
in this country, was 6.5 percent. Then, in response to the meltdown in the
technology sector, the Fed began cutting the rate. By August 2001, it was at
3.75 percent. And after the terrorist attacks of September 11, the Fed opened
the spigot. By the summer of 2002, the federal funds rate was 1 percent.

No mention of the reason for the low rates i.e. to spur economic growth. The
administration wanted to PROVE that tax cuts cause enough economic growth to
grow government revenue. The way to do that if the tax cuts aren't really
working is to keep lowering the interest rate. Now that the whole house of
cards has fallen down, it is very silly to be saying that less government
would be the solution.

I would say that in June of this year I was a hardcore libertarian, and I have
been pretty much since I had become politically aware, but after digging
through the events and the economics of the crisis, my mind has changed. When
it comes to financial markets, they are going to swing. But government's role
should be to force publicly traded companies to have transparent books, and
the financial industries where anything but transparent in the last few years.
A stronger SEC would have helped in that regard.

~~~
newsycaccount
When a company engages in systemic risk, it discounts that risk by the amount
of the system the company doesn't occupy (e.g. if Goldman does something that
will create a 10% chance of a $100 billion dollar loss, spread evenly across
the financial industry as a whole, and if Goldman only makes up 5% of the
industry, Goldman will only take into consideration a 10% chance at a $5
billion loss. The other $95 billion isn't their problem and their shareholders
could sue members of the board if the board allowed the company to take it
into account).

------
thomasmallen
Superbly written, and a sobering read. As a proponent of small government, the
ideas themselves are echoes, but I appreciate the wealth of evidence provided.

The big governments of the past sixteen (or, arguably, eighty) years have
provided quite a bit of ammunition for political conservatives, and this
spiraling crisis to me resembles an endgame for big government. Its bloat and
poor decisions will result in bankruptcy and a timely education for those
who've forgotten that the US government is inherently inefficient. This
inefficiency is by design, for fear of a hulking administration was the
primary motive in drafting such a constitution.

Or, this will become a runaway train, and the government will grow like a
cancer til its collapse. Let's hope not.

------
quoderat
Wow, that's a terrible article, short on facts and long on ideology.

The vast majority of the subprime mortgages doled out were never sold to
Fannie or Freddie -- they were bought up eagerly by investment banks who had
lax leverage requirements. Many of these mortgages were originated by in-house
origination units, so, yep, they knew what they were doing.

Blaming government regulation and lending to low-income borrowers for the
financial crisis is like blaming the janitor at JPL for the Challenger
exploding.

Talk about clueless...willfully clueless.

------
davidw
Could we keep reason.com, mises.org, Krugman, Stiglitz, all titles with Obama,
and all that on other sites? Please?

~~~
bayareaguy
NickB's <http://www.newmogul.com> is a better place for this kind of thing.

------
jderick
I don't see how you can be a libertarian these days while addressing the
current financial crisis without presenting some kind of rebuttal to the
commonly held view that it was the do nothing (aka libertarian) government
that was responsible for prolonging the Great Depression. Also, the lack of
regulation coming into the current crisis allowed banks to take on much more
risk then they should have. Overall, it is not clear what solution this
article is proposing.

~~~
davidw
> what solution this article is proposing.

If it's on reason.com, you don't even have to look at the article. The answer
will always be "less government, more free market". They're boringly and
religiously predictable, just like some people on the left always call for
"the government" to step in and (magically?) fix everything. I think neither
one is particularly intellectually stimulating and the ensuing debates have
been acted out a million times on the internet.

~~~
pg
Are they mistaken in this case?

~~~
davidw
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.

The best thing I've seen so far is this:

[http://www.marginalrevolution.com/marginalrevolution/2008/10...](http://www.marginalrevolution.com/marginalrevolution/2008/10/my-
views-on-the.html)

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.

~~~
pg
_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.

~~~
davidw
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.

