Patrick: Week 3 (January 31- February 4)

This week, my boss approached me with an idea for a book project he wants to pursue. In light of all the complexities surrounding our country's financial crisis of 2008, he wants to write a "layman's guide" to understanding the crisis. Given our organizational interests, the work will be written from a "free-market" perspective. I hope to get the chance at a writing role on the project. For now, however, I have been tasked with locating various "free-market" theories and commentaries on the crisis. This research process has proven to be extremely enlightening.

Without becoming overly long-winded or technical, I must admit my frustration at individuals and groups who continue to rely on misguided understandings about the origins of the crisis to vilify the free market, deregulation, and limited government as the "culprits" of it. There is no point in trying to deny the fact that numerous financial institutions and their executives acted recklessly in the series of events leading to the collapse of some of these very institutions. However, very few individuals and groups care to acknowledge the fact that government intervention into the economy incentivized such recklessness. In an effort to spur home ownership among low-income families, Fannie Mae and Freddie Mac (government-sponsored enterprises created by Congress) encouraged banks to loan large sums of money to individuals who could not pay them back. Fannie and Freddie did this by promising to purchase the seemingly "bad debt" back from the lending banks. Fannie and Freddie hoped to turn a profit of their own by packaging the "bad debt" together with safer investments to create mortgage-backed securities. Although the "bad debt" inherent in these securities never disappeared, it was masked by various government-sponsored financial rating services (i.e. Moody's) when they attached "AAA" ratings to these securities and injected "false confidence" into the purchase of them. By solidifying the purchase of these investments, the ill-advised lending practices that made these investments possible were--by extension--also solidified. Finally, as the low-income families mentioned earlier began to default on their exorbitant mortgages, the institutions and investments designed around these mortgages began--not surprisingly--to collapse as well.

By explaining the financial crisis of 2008 in this fashion, I am not arguing that the financial institutions and executives at the forefront of the larger crisis deserve no blame for it. These institutions and executives did indeed pull the "trigger" on the crisis. However, our government's intervention into the housing market provided "the gun and bullets." In this vein, our country's current financial woes must not be attributed to a systemic failure of free market capitalism and deregulation. Rather, they must be attributed to a combination of ill-timed government intervention into the U.S. housing market as well as poor isolated decision-making by various financial institutions and professionals in response to such intervention. In short, any supposed “systemic failure” of free-market capitalism and deregulation is an indefensible concept that only remains sensible in socialistic fantasy worlds.

Ok, this ends my rant.

I hope everyone is doing well.

-Patrick