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Some Sanity On The Financial Crisis

As many authoritative economists are desperately trying to explain amid all the confusion, the culprit was a system geared toward loaning money to people who were not in a position to pay it back. Two policies underpinned that system: easy money by the Federal Reserve and the government-induced lowering of standards for approving loan requests. […]

As many authoritative economists are desperately trying to explain amid all the confusion, the culprit was a system geared toward loaning money to people who were not in a position to pay it back. Two policies underpinned that system: easy money by the Federal Reserve and the government-induced lowering of standards for approving loan requests.

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The fact that, as Sebastian Mallaby pointed out in a recent op-ed in The Washington Post, “lightly regulated hedge funds resisted buying toxic waste for the most part” also belies the notion that deregulation was the culprit. The real purchasers were U.S. investment banks regulated by the Securities and Exchange Commission, U.S. commercial banks regulated by the Fed, and European banks that are among the most regulated in the world. ~Alvaro Vargas Llosa

It is therefore all the more depressing that Obama has chosen to denounce generic deregulation as the main culprit, while McCain has opted, as usual, for uninformed moralizing against private sector corruption.  Of course, if I were the nominee of the party that championed the mortgage lenders or the nominee who loved Greenspan so much that he wanted to keep him as Chairman even after he died (notice that McCain doesn’t tell that joke anymore), I would probably try to find something else to talk about. 

The trouble arose because of the effective collusion between government agencies and investment banks on the one hand (allowing the latter to become horribly overleveraged), and because of large-scale government involvement in the housing market through the government-backed mortgage lenders and loose monetary policy on the other.  The latter made possible the creation of the housing bubble, while the extraordinary risk-taking that the government backing of the lenders permitted helped make the bubble larger than it would have otherwise been and ensured that it would collapse more violently.  The past two administrations and both parties share in the responsibility for this, and the bipartisan cult of Greenspan has much to answer for as well, but it is also perfectly fair to place the bulk of responsibility on the people who were in the majority and in control of the White House as the problems were growing and being exacerbated by many of the policies that they supported.  Now to solve the problems created by past intervention and collusion, they offer more intervention and collusion.

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