Leon Louw, Executive Director of the Free Market Foundation, explains in simple language the causes of the financial crisis.
Leon Louw’s article One man’s ‘crisis’ is another’s correction first appeared in Business Day on 3 October and should be read by clicking on the link.
Here are some random extracts courtesy of Business Day.
“HOW does twaddle get transformed into truth? According to peddlers of twaddle, the subprime crisis was caused by “greedy capitalists” and the ensuing financial crisis is the result of “market failure” or “capitalism in crisis”. Not so. All of it was caused by extreme anti-market government intervention. Here follows my Idiot’s Guide to the Financial Crisis.
The European financial crisis is simply a matter of socialistically inspired governments spending themselves into bankruptcy. The US crisis is similar in principle. It started when the US government decided to promote private housing for the poor.
Because “the market” doesn’t provide mortgages to people with no incomes, jobs or assets, the government adopted a low-income, “subprime” housing strategy to induce banks to finance “toxic” mortgages. Its giant government-sponsored enterprises (GSEs), Freddie Mac and Fannie Mae, then bought these toxic mortgages from the banks, thus converting high-risk loans into zero-risk loans. US banks were ecstatic. The US government, intoxicated by its success as banks, realtors and developers responded enthusiastically, issued millions of tax-backed mortgages. But then the GSEs ran out of money.
Free market advocates were ridiculed or ignored. Eventually, the market burst the bubble. Market success triumphed over government failure and set in motion the long overdue, painful and protracted correction, which has been called a “crisis”.
The government did not give up. It adopted the New Deal — Keynesianism on steroids and the most extreme spending orgy in history, consisting of “bail-outs”, “stimulus” and “quantitative easing”. These are iatrogenic policies. “Iatrogenic” is a medical term for counterproductive treatment that harms or kills the patient. That anti-market remedial policies are failing may be the final nail in the Keynesian coffin and free market capitalism may prove to be vindicated rather than vanquished.
Is the market blameless? No. Many investors were reckless. Some broke the law. The difference is that government intervention was a necessary and sufficient condition for the “meltdown”. What private institutions did was neither.
Despite these facts, anti-market fundamentalists and interventionism denialists continue blaming the “unregulated market”. Financial markets are the most regulated of all. Financial crises, therefore, are attributable to excessive regulation. Much-vaunted deregulation could not possibly explain the crash because all that happened was that Bill Clinton brought the US into line with other countries with integrated financial services.
The basics are surprisingly simple — the confluence of extreme anti-market interventions including: GSEs, whose sole purpose was to deluge the market with toxic mortgages; the huge government-backed secondary mortgage market; fiscal and monetary profligacy; banking regulations that forced banks to undervalue derivatives; and the like.”