mrstickball said:
But again, the reason the government 'took a step back and let them get on with it' was that they initiated the activity themselves. As I said, the government incentivized the bad behavior by removing systemic risks from loaning to certain parties. That is certainly not a free market activity. For example, look at when American home ownership began to skyrocket in late 1994 through 2006. Did the banks initiate a new policy in 1994? Yes. The government forced them to add new policies to lend to people, which resulted in them starting to take on more loans than what was reasonable (due to government rules/regulations incentivizing them to lend to minorities). In addition, CRA1995 continued the reckless behavior of the Rigele-Neal Interstate Banking Act, and continued to ensure that banks would be taking on more systemic risks due to regulations (trying to get rid of redlining) - not de-regulations. Look at the data - from 1994 (institution of the Rigele-Neal Interstate Banking Act) to 1998 (prior to the Gramm-Leach-Billey Act and CRA 1999 revision), home ownership skyrocketed from 64% to 67% which 3/5ths of the increases between 1994 and the peak of American home ownership at 69% in 2003.
If de-regulation was the entire culprit as you suggest, then the data should prove it. However, the data shows an inexplicable jump in American home ownership in 1994/5, not when Glass-Steagal was repealed in very late 1999 (November 1999). I will gladly admit that CRA1999 contributed to the collapse, but the issue was initiated by the government - CRA1999 merely prolonged the issue as banks were able to hide the assets they were required to loan because of the governments intervention in the markets. Therefore, the free market wasn't the culprit - government intervention was, re-regulation was merely a player in the events. Certainly, there was 'too much risk' - risk that was forced upon the market by the government, whereby they required and/or incentivized banks to loan to people that could not afford it. The predatory lending/subprime crisis was created by the government which wished to increase home ownership rates as a mean of boosting the economy. They incentivized the risk by pressuring institutions like Fannie Mae to meet specific goals for loaning to low and middle class people which were well in excess of free-market standards (30% versus 10%, give or take). In the end, we provided $700 billion in TARP funds for part of the crisis, and may provide up to $360 billion to bail out Fannie & Freddie - those who took on the burden of the CRA's socialist goals - which failed utterly. I fully agree that a totally free market is likely to never happen, but the housing crisis should be significant proof that governments intervening in the market can have significant, if not devastating, consequences. |
I thought the following were de-regulation i.e removing forced Federal and State regulations of the free market (and all three contributed to the financial crisis)
Community Re-investment Act- Made credit default swaps legal. This was not regulated at all and free market did not introduce a self regulatory body to oversee it.
Rigele-Neal Interstate Banking Act- Allowed banks to operate nationawide. Surely de-regulation of the financial sector?
Gramm-Leach-Bliley Act- Allowed security, insurance and bank companies to operate in all financial sectors and not just their own specific areas. I can't see how this can be described as anything but de-regulation of the financial sector.
All of the above were initiated and passed because the Senators and others in power (like from the Treasury) who advocated such acts were generally speaking from the financial sector. Massive conflict of interest if you ask me. Between serving the good of your nation and it's majority inhabitants and the good of Wall Street. Key word again here is 'externalities'. I can't see how any of the above can be blamed on Keynesian economics. I mean it's like the last 6-7 administrations kept parts of the Keynesian economics that would make them and their buddies in the financial sector wealthier but ditched all the regulatory part thanks to the work of Friedman and co. Cronyism I call it.
If you look at the growth of the US during it's Keynesian years, it was much more egalitarian (though it rocketed post war and decades after that), wages were relatively speaking better and the average American had a better quality of life. For the last 30 years though, wages have stagnated (relatively speaking) and most of the wealth generated through deregulation and monetarist economics have gone to a small yet very powerful elite. The US economy pre 2008 Financial crash was more free market then it had ever been though some would argue not enough and not a 'real' free market as I'm sure a lot of mega corporations such as the big banks must of known they were too big to let fail and hence there would always be a golden parachute waiting to rescue them in a worst case scenario.
What I find unbelievable is Obama is hiring the very people who liberalised the financial sector to put the house back in order!
