Sunday, February 22, 2009

Moral Blindness in the Credit Crunch

America's federal government officials refuse to acknowledge their share of the blame for the financial mess. Their share is the lion's share.

Of course, many investors, bankers, and traders turned out to be stupider than their MBA degree-granting institutions would like to admit. They kept pumping up the pressure on real estate prices as if bubbles do not pop.

Agents of the federal government - the FMs, CRA, ACORN, and the Federal Reserve - set up a system in which blowing the bubble was strongly encouraged. Artificially low interest rates, the MBS/CD debauchery, and the pressure to make bad loans exerted by the CRA and ACORN were a system of government controls that inhibited free market pressures.

It is difficult for Americans to recognize the blame that their government deserves, a fact which is even more remarkable, given how much Americans detest their government. This is because we accept as given that the government will interfere strongly with the market and put the onus on business to comply with the government's leftist and redistributionist rules of business. We now expect this government influence. It is part of the woodwork. We don't notice that it is not necessary but merely optional.

This is why we stupidly blame free market forces for the credit crunch. While some businessmen were incontinent and stupid at the prospect of making a bundle in the FM/MBS system, free market forces have none of the blame for this because they were not in play. This is the key point: The Bush Administration should have regulated the CDS market and tried harder than they did to get the Democrats to clean up their monster FMs. But this only means the administration should have interfered with the market more in order to compensate for the effect of other government interference with the market. To think that the Bush Administration left the market too free is to exhibit a misunderstanding of what happened. Since this misunderstanding persists even though the facts are plain, it is a kind of blindness. Of course, the leftists will prey on your blindness and pronounce the era of free market capitalism dead.

UPDATE: Terence Corcoran, Financial Post.