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The credit crisis was not due to lax regulation

by | 10:57 pm, October 6, 2008 | Comments Off

People's willingness to believe in the power of regulation over the free market is amazing. Perusing a listserv, I came across this snippet of economic illiteracy:

"Much of this was the result of lax regulations on financial insitutions which allowed them to make these risky loans in the first place, thus encouraging the overspending and under savings, encouraging individuals to purchases houses that are well beyond their means and thus drving up the housing costs, which of course in turn encouraged more investment in the housing."

I see this position advocated all over the media, and it is demonstrably incorrect.

Lax regulations were not the problem. The government actively encouraged loose credit to home buyers via Fannie Mae and Freddie Mac, leading to bad loans, defaults and the current situation.

If the free market had been left alone, the ridiculous number of bad loans would not have been made. Bad loans result in losing money. The free market hates that. Government doesn't. Fannie and Freddie, and their investors, knew that any losses they incurred would be backed by the federal government.

And voila, they were right.

The free market doesn't nationalize losses of private businesses, and it doesn't encourage bad loans.

The federal government does both.


The Williams Law Office, P.C. Denver, Colorado 303-800-0894
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