Wrong again Diane…
On Monday, Diane Francis attempted to defend the actions of the Obama administration by casting aspersions on the free market:
free enterprise was nearly murdered by Wall Street, AIG and other reckless financial institutions. They did not meet their defined responsibilities. They bent the law to bypass rules governing their behaviour. Many of them abandoned traditional banking and got into the gaming business. And they brought the world to the brink in the fall.
The problem here is that those on Wall Street did not act alone. They colluded with the state. For instance, in the dying days of the Clinton Administration, Congress passed and the President signed into law a reversal of the 1907 ban on bucket shops. Note the significant similarity of bucket shops to credit default swaps that were the root of the fall of AIG and some investment banks.
And the development of these derivatives was partly driven by the need of the banks to unload questionable investments (i.e. toxic mortgages) inside structured investment vehicles. And why did they have these toxic mortgages? Because the government told them to lend money to pretty much anyone – because there was a political drive to increase the rate of home ownership in the United States. These government interventions in the economy began during the Nixon administration, and were expanded and intensified during the administrations of Carter, Bush the First, Clinton and Bush the Second.
I will agree the financial industry does hold some of the blame – they trusted their hedging models that could not handle significant unexpected events. This was shown to be true during the Long Term Capital Management crisis of 1998. And they lobbied the government to allow “gambling” on the markets.
But the government allowed them to be less than transparent and allowed the gambling that was shown to be bad a century ago.
So Diane should be careful when she asks us to trust the state to fix a problem they had a significant hand in creating. She should remember the prescient thoughts laid out by Ludwig von Mises in his book Liberalism:
… government intervention in markets will lead inevitably to unintended consequences that result in further government intervention.