Wednesday, February 4, 2015

(Re-Post) Anti-capitalism myth: Greed and a lack of regulation caused the financial meltdown

Related Update: For those of you who enjoyed the original post, I offer this Northern perspective on the American financial meltdown (HT: Mark Perry at Carpe Diem).  What I find interesting, (and hopeful) is that this Canadian politician is trying to take the lessons from our experience and encourage his fellow statesmen to learn from them.  Perry provides a nice excerpt of the politician's speech, my favorite part of which is:
In sum, the government encouraged millions of Americans to spend money they did not have on homes they could not afford, using loans they could never repay and then gave them a tax incentive never to repay it. The state had pumped so much air into the mortgage bubble that it burst. (Emphasis Mark Perry).

Original Post:

The dominant narrative regarding the cause of the financial meltdown that started in the fall of 2008 holds that it was, in effect, a failure of our free-market capitalist system.  Specifically, this view lays the bulk of the blame on the greed of those in the various financial industries involved (e.g. banks, brokerage firms, mortgage lenders, real estate firms, etc.).  Further, it’s asserted, this greed was allowed to materialize unchecked due to a lack of regulation, ultimately causing the housing bubble to burst.  This, in turn led to the meltdown of the stock market and the subsequent chaos in the banking and insurance industries. 

It’s easy to see why such a narrative would be accepted by many: it pretty straightforward and easy to understand; it caters to the popular view of Wall Street bankers as greedy capitalists who have gamed the system and don’t care who they harm or how much damage they do to our society as long as they keep making money; and it suggests an approach for solving the crisis and ensuring we don’t have a repeat in the future.  What we need, so goes the narrative, is more governmental involvement in the economy to lift us out of the recession our capitalist system put us in, and more governmental oversight and control of the greedy financial industries to ensure we don’t have another such crisis.  But as appealing this narrative is – and there is an element of truth to it – in terms of the most important and fundamental causes, ultimately, it is wrong.  At its core, the financial meltdown was the result of massive, long-term governmental intrusion in the various elements of the financial and housing industries.

A detailed explanation for the causes of the meltdown lies beyond my area of expertise and, consequently, is not the specific purpose of this post.  However, it is my intent to point you to a few excellent resources that can provide a thorough treatment of the causes and effects of the meltdown.  There are four in total: three of which offer detailed examinations, each from a different perspective.  The fourth is a shorter essay which may well suffice for most readers.

First up is a book by Dr. Thomas Woods, a Senior Fellow at the Mises Institute and an economic historian of some reputation.  His book, Meltdown is written for the masses, easy to read and understand, and doesn’t bog the reader down with too much financial jargon.  The second offering is by John Allison, former CEO of BB&T and current President of the hugely influential, libertarian think tank, The Cato Institute.  In The Financial Crisis and the Free Market Cure , Allison, who was the CEO of BB&T during and after the meltdown, offers an insider’s account of the causes of the meltdown.  And though he provides the reader with a detailed discussion of the various proximate causes for the crisis, he goes further by identifying the ultimate cause as a failure of philosophy.  The last quarter of his work explains what he means by this and is, to my mind, worth the price of the book by itself.  I should note that Allison’s book is more technical than Meltdown; this, coupled with the philosophical aspects, make his work more intellectually challenging than Woods’.  The third comprehensive account comes from a well-known academic economist, Russ Roberts.  Roberts, at the time at George Mason University, wrote his paper for the Mercatus Center at GMU, the link to which can be found here.  Be warned: this is very much an academic paper, lengthy (44 pages), full of citations and graphs, but surprisingly accessible for a non-expert in this area such as myself. If you’re feeling intellectually vigorous, go for it!
If the above three resources are a bit much, consider this superb, relatively short essay written by Professor Steve Horwitz at St. Lawrence University.  It’s in the form of a letter to his liberal friends, and touches on all the main causes of the meltdown in a way that is not too detailed but still sufficient in depth.  And the style and manner of his essay is pleasant and captivating.  I love his opening paragraph:
My friends,
In the last week or two, I have heard frequently from you that the current financial mess has been caused by the failures of free markets and deregulation. I have heard from you that the lust after profits, any profits, that is central to free markets is at the core of our problems. And I have heard from you that only significant government intervention into financial markets can cure these problems, perhaps once and for all. I ask of you for the next few minutes to, in the words of Oliver Cromwell, consider that you may be mistaken. Consider that both the diagnosis and the cure might be equally mistaken.

If you read only one thing on the causes of the meltdown, I strongly recommend that you read Horwitz's essay.