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The Credit Crisis and the Free Market

In the movie Burn After Reading, a highly placed CIA official remarked of a major fiasco "Let's just not do this again...now we just have to  figure out what we did." (Or words to that effect...probably more eloquent than my paraphrase.)

These words certainly apply to what is going on in our financial markets. I know I have a lot of sore neurons from trying to figure out what we did. I don't think I am the only one.

A lot of people are very quick to blame laissez-faire economics. This seems simplistic to me. For one thing, it assumes we have been living under an absolutely unfettered economic system. Nothing could be further from the truth. Walter Williams makes an excellent case in his column Capitalism and the Financial Crisis that we already have plenty of regulation. You can differ with Dr.Williams on whether or not the regulation in existence is a good thing. But the facts he cites demonstrate that it does in fact exist.

Alan Bock in his column Freedom Works makes the case that government intervention actually caused the credit crisis. I understand that making the case that "A caused B" is a lot harder than making the case that "A exists" and that Bock is doing the latter. But he makes good arguments.

One area where regulation might be needed is in the area of credit default swaps. I don't understand them completely, but as near as I can tell they are a promise made to the buyer to pay the principal of a bond if the bond issuer defaults. SEC chairman Chris Cox  has called for greater regulation of CDS's.

I wouldn't have a huge problem with requiring more transparency. As near as I can tell (and like I said, my understanding is fuzzy), Cox just wants to make sure that before someone takes on the obligation that comes from selling a CDS that they have the capital to back it up. This is reasonable, and can fall under the exception most libertarians make for laws forbidding "force and fraud."

On the other hand, a recent Wall Street Journal article makes the case that credit default swaps were not really the problem.

This post has been an admittedly superficial treatment of a complex problem, and I will probably make similar entries in the future. But I am not giving up on free market economics just yet. In fact, I recently made a donation to the Ludwig Von Mises Institute. With free-market economics falling into disfavor and the economy going south, they probably really needed it. I have never felt so sure and so happy about a decision in a long time.


Good on you for donating. And I totally agree about the people who claim that laissez-faire economics caused the current economic crisis. I just want to ask "WHAT laissez-faire economics?" The Republicans have been going the big-government, regulatory, spend-a-lot route for years.

I posted a Reason cartoon on my blog which detailed exactly this, a while ago.

It's like looking at one of those people who claims that he'll stop overdrinking, never manages to, and then saying that the ideal of soberity is bad because, obviously, look at that guy!

I really don't know anything about the financial crisis, but from what I did know, I was reminded of Eugene Lawson, the banker in Atlas Shrugged who made a loan to anyone who "needed it", whether they could pay it back or not. Of course, his bank crashed. (What did anyone expect?) To me, it seemed that the US government was enforcing Eugene Lawson-ism on a huge basis.

Edited at 2008-11-17 09:27 pm (UTC)