As is not unusual I disagree with this assertion by John Tamny in his latest offering at RealClearMarkets:
Left alone, economies and markets never go haywire when natural market forces are putting out to pasture the weak, only to redirect the previously underutilized resources of the weak to higher uses.
That is false and even the slightest knowledge of economic history would have made that clear to him. The National Bureau of Economic Research, the official scorekeeper of recessions in the U. S., lists every recession since 1857. At least the first eight of those took place while the federal government maintained a laissez-faire policy. That doesn’t even include the many famouse crashes and panics that took place before 1857. And Mr. Tamny has apparently never heard of the Tulip Craze or the South Sea Bubble, two times when economies went hayware without the benefit of state intervention.
That having been said in the article Mr. Tamny has a point. What happened in 2008 has been widely mischaracterized, probably because “financial crisis” sounds so much better than “regulatory capture crisis”. Make no mistake federal or hybrid government institutions knew about the problems, recognized that they were problems, and had the authority to prevent the crisis but did nothing, presumably because they thought they were profiting from it or might profit from it.
And they were right! Tim Geithner, the Forrest Gump of the crisis, was actually promoted for his misfeasance and nonfeasance. And I have yet to see any proponent of activist government explain how they would prevent regulatory capture which at the very least casts a pall over their preferred solution. I’ve made any number of suggestions of how that could be done but I don’t expect any of them to gain any support.
So we’ll just have another boom and bust, the brunt of which will fall on the people least able to cope with it.
“…federal or hybrid government institutions knew about the problems……………..but did nothing, presumably because they thought they were profiting from it or might profit from it.”
Or were blind adherents to “housing for all” social engineering.
Taking jobs with the companies you’re supposed to have been regulating doesn’t sound like social engineering to me. I suspect that they looked at it as a win-win situation. They could push a home ownership for all agenda while preparing the way for a cushy, remunerative sinecure at the same time. Or consider Alan Greenspan. I don’t think he gave a flying frip about social engineering but he was a Randian anarcho-capitalist at heart. His heart wasn’t in regulating the banks.
“Or were blind adherents to “housing for all†social engineering.”
Yup! Housing for poor people did us in.
” knew about the problems, recognized that they were problems, and had the authority to prevent the crisis but did nothing”
They, some of them, actually believed the same stuff Tamny did. The markets are correct and the govt should not interfere. Probably help that their friends and family were making millions selling liars loans, and they knew they could soon leave to join the bonanza.
Steve
Just to restate my views, I believe that free markets, free trade, and liberal values more generally are hothouse flowers. They are fragile and require ongoing prudent care and attention to flourish. They do not thrive in a state of nature.
Not that my views are in conflict with those of anarcho-capitalists who in general believe that all government other than enforcing contracts is bad and with those of progressives who believe that society moving inexorably in a more liberal direction is inevitable.
No, but the push to relax lending standards, begun under the Clinton administration, is social engineering. It’s possible to have brokers, bankers, regulators and politicians all behaving badly all at once. It’s not either/or.
The center of the crisis was the repo market, not regulation or subprime loans.
Corporations like to make low-interest, ultra short-term loans to each other. Prior to 2000 the preferred collateral was Treasuries because they’re zero risk; but we had a Treasury shortage at the end of the Clinton Administration so corporations began using mortgage-backed securities. At that point corporate demand for MBS exploded and spawned its own industry. When credit-worthy borrowers were exhausted banks lowered their underwriting standards and generated what the FBI called in 2004 “an epidemic of mortgage fraud.”
Without the prevalence of MBS as collateral the subprime bomb wouldn’t have amounted to much. It was the sudden loss of collateral that caused an economy-wide loss of liquidity and the subsequent financial crash.
It was reported that in 2006 about half of all loans were liars loans. I am pretty sure that if half of all outstanding loans in any kind of system you want to devise are given out without verifying that borrowers have any income at all and can afford the loan, that system is going to crash.
Obviously, lots of other stuff was going on, and some as Ben notes probably amplified the problem. As Dave notes, the people who were supposed to be in charge were too busy making money, or helping their buddies make money, to do their job. But you don’t need to invoke term like regulatory capture or MBS. It should be pretty easy to understand that if you just give out money w/o knowing if people actually have the means to pay it back, those loans are going to fail. Should not take a financial genius to figure that out.
https://www.nytimes.com/roomfordebate/2011/01/30/was-the-financial-crisis-avoidable/when-liars-loans-flourish
Steve