Argument: Too much regulation, not too little, caused US economic crisis
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"Scapegoating markets". Chicago Tribune. 28 Sept. 2008 - Although capitalism has shown its superiority to other systems, it has always had plenty of detractors. The meltdown in the financial sector is their latest excuse to assert the dangers of greed, the need for greater government regulation and the folly of unfettered commerce. They see the market the way it's depicted in the sculpture in front of the Federal Trade Commission in Washington, which shows a well-muscled man restraining a rearing stallion: a wild steed in need of a bridle.
Markets, of course, consist of interactions among human beings, and any institution featuring people is bound to suffer from human fallibility. No one ever said markets were perfect at the tasks required for a functioning economy—only that they are generally superior to the alternative. Sometimes those imperfections require government intervention—to prevent unwanted side effects like pollution or to promote the sort of information needed for sound decisions. But the causes of this debacle lie elsewhere.
Focusing on greed is a mistake. As economist Lawrence White of the University of Missouri-St. Louis puts it, blaming greed for economic dislocations is like blaming gravity for airplane crashes: Greed and gravity are both ever-present. Wall Street traders are not more or less avaricious today than they were 10, 20 or 50 years ago.
Nor is lack of regulation the root of the problem. Among the alleged lapses is the 1999 repeal of the Depression-era Glass-Steagall Act, which forbade the mixing of commercial and investment banking. Removing that barrier, we are told, spurred commercial banks to get into such risky investments as subprime mortgages.
Daniel Mitchell, a senior fellow at the Cato Institute. "Bailout Would Impose Needless Economic Damage". Real Clear Politics. 1 Oct. 2008 - Government Caused the Turmoil in Financial Markets One of the ironies of the bailout debate is that supporters think that more government intervention is the solution to problems caused by bad government policy. The main mistake was probably the Federal Reserve's easy-money policy. By creating too much liquidity and by driving interest rates to artificially low levels, the Fed set in motion the conditions for a housing bubble.
But this housing bubble is particularly severe because another government mistake - the pernicious and corrupt policies of Fannie Mae and Freddie Mac - lured many people into mortgages that they could not afford. When a housing bubble bursts, that can have a negative effect on economic activity because people lose wealth (or lose the perception of wealth). But when people have been lured into homes they cannot afford and a bubble bursts, the economic consequences are more severe when a bubble bursts because people not only lose wealth, they also lose their homes. .
Other mistakes include policies such as the Community Reinvestment Act, which extorted banks into making loans to consumers with poor credit. There are also many other policies that have encouraged economically inefficient levels of housing investment, such as the mortgage interest deduction in the tax code.