The Financial Crisis
| Peter Klein |
A regular reader asks why we haven’t written much on the US financial crisis. What, he asks, do organizational economics, strategic management, Austrian economics, entrepreneurship theory, and the new institutional economics say about the events of recent weeks?
I can’t speak for Nicolai, Dick, and Lasse, but I personally have avoided talking about it because, well, I’m too depressed — not so much about the crisis itself, which I view as a necessary corrective to two decades of potentially ruinous malinvestment, but about the political reaction to it. I agree with Larry White that the general level of discourse not just among laypeople but also among the political and financial elites, top journalists, and academics, has been shockingly vapid and vacuous, even by the usual standards. Listening to government officials, pundits, and analysts analyzing the crisis is like listening to my son’s first-grade class discussing the finer points of postmodern French literature. It was too much deregulation! (Huh?) The free market broke down yet again, just like in the 1930s! Market failure! Thank goodness the government is “stepping in”! Excuse me while I blow my groceries.
My view, in brief, is that the current crisis is the predictable result of a massive credit bubble that began under Greenspan in the 1990s and spilled over into the housing market, following the general outlines of the boom-bust cycle described by the Austrians, along with moral hazard encouraged by the financial “safety net” and the implicit (and, increasingly explicit) guarantees of the “too-big-to-fail” mentality. Of course, the US government’s reaction — spending taxpayer money like candy to bail out favored groups and institutions — can only exacerbate the problem. You can do your own Googling like this or this to find informed commentary. I have little to add but will highlight a few favorite comments:
- I like Alex’s summary: “Thank goodness we bailed out Bear Stearns back in March. If we hadn’t we might have lost Fannie Mae and Freddie Mac, Lehman Brothers, Merrill Lynch and who knows what else. Oh wait. . . .”
- Bob Higgs: “The failure of Fannie Mae and Freddie Mac, setting in motion the biggest government bailout/takeover in U.S. history, brings a grim sense of fulfillment to competent economists. After all, what did people expect, that water would flow uphill forever?”
- Peter Wallison is one of the few who understands Freddie and Fannie: “Recent statements by Barney Frank (D., Mass.), the chairman of the House Financial Services Committee, and Chuck Schumer (D., N.Y.), a powerful member of the Senate Banking Committee, make clear that Congress will never let them be privatized, broken up, slimmed down, nationalized or any of the other options hopeful reformers are putting forth today. Fannie and Freddie in their current form are just what Congress wants: an inexhaustible source of campaign contributions and funds for favored groups.”
- Lew Rockwell makes an excellent political point, namely that the nationalization of Freddie and Fanny (and now, this morning, AIG) was accomplished by executive fiat. The treaury secretary in the former case, and the Fed chairman in the latter case, simply decreed that the state would take over these multi-billion-dollar enterprises. No discussion or debate, no Congressional deliberation, no court rulings. Simply the stroke of a pen. Imagine the reaction among the punditariat if, say, Hugo Chavez did such a thing. (Of course, we don’t use the word “nationalization.” Lew wittily suggests reissuing Marx and Engels under a new title, The Conservatorship Manifesto.)
Entry filed under: - Klein -, Austrian Economics, Bailout / Financial Crisis, Classical Liberalism, Corporate Governance, Institutions, Public Policy / Political Economy. Tags: Bailout / Financial Crisis, paulson.