The Economist has an omnibus article up, mainly about the causes of the subprime crisis and its global ramifications. The article, in my opinion, spends an inordinate amount of space rehashing tired talking points about deregulation and liberalization. Disappointingly, they mention Glass-Steagall, without mentioning the drastic empirical evidence pointing in the opposite direction. They also make this doozy of an error:
The share of Americans who owned their homes rose steadily. But more buyers meant higher prices, making loans even less affordable to the poor and requiring even slacker lending standards.
They have it right that rising housing prices encourage looser mortgage lending, but they don't have the reason right. The real reason is that in a rising market, a bank can be reasonably sure that even if the mortgage goes into default, the collateral (the house) will be worth more than when the mortgage was taken out, and thus will cover the principal of the mortgage. But more importantly, they know that it likely won't come to this, because rather than default and lose the extra value of the home, home"owners" are far more likely to just sell the house, pay back whatever they need to, and pocket the difference. Banks don't just loosen their standards simply because people can't afford to pay higher standards – a freshman business student who made that decision would fail.
I haven't had much respect for the Economist once I started to actually understand the issues it talked about – I agree with Andrew Sullivan that it's "a kind of Reader's Digest for the upper classes." It's disappointing that, on this crucial issue whose narrative is going to shape policy for years, the global elite's preferred "newspaper" of classical liberalism is so lacking when it comes to understanding the roots of the crisis.
But then again, even Bob Barr, in an interview on NPR (MP3 here), lays the blame of the crisis largely on the back of bad regulation – when the Economist and the Libertarian Party's presidential candidate can't even explain the statist roots of the crisis, you know that libertarianism is in trouble.
2 comments:
There's a difference between "deregulation" or "bad regulation"-- I agree that there was bad regulation in Fannie Mae and Freddie Mac, who have an entire federal agency with a $60 million budget watching over them and still couldn't get things right. The agency said they were fine. That's bad regulation.
What Democrats and others are blaming is "deregulation," which is something else altogether.
Also, I think it's important to make the difference between regulations on government enterprises like Fannie Mae and Freddie Mac (which, by restricting gov't intervention in the market, are pro-libertarian), and regulations on private enterprises (which, by restricting private free market activity, are anti-libertarian).
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