I normally frown upon blog posts consisting of large chunks of direct quotes, but John Tamney has hit a home run.
Deregulation and free markets didn't wreck the world economy--Government protections did. Bad banksters and the governments who love them are the Bonnie and Clyde of global monetary scams.
Governments have shielded banking from market forces, and we're all now paying the price:
it's apparent from the myriad bailouts of banks within it in modern times that, absent government protection, the financial world would look quite a bit different. Put simply, political unwillingness to apply market forces to the business of finance means that its long-term health and dynamism is in fact reduced.Government intervention distorts markets and creates perverse incentives
The better, more realistic, explanation for the paralyzed credit situation in the aftermath of Lehman actually goes back to the spring of 2008. It was then that the Fed and Treasury, fearing "contagion" relating to Bear's demise, saved its creditors through a deal in which the Fed took Bear's debased assets on its balance sheet.
Then J.P. Morgan was offered the still-functioning bank on the relative cheap, its downside covered by the federal government. As Wallison put it, "I see the market meltdown that followed the Lehman bankruptcy as a result of the moral hazard created by the rescue of Bear Stearns six months before."Your government took the toxic assets off of the banksters's accounts and put them on YOURS
Other accounts of the time in question support Wallison's view. The fact that the federal government subsidized J.P. Morgan's acquisition of Bear Stearns created an expectation among healthy financial institutions that they too should have their downside protected in snapping up insolvent firms.
As Andrew Ross Sorkin put it in his 2009 book, Too Big To Fail, acquirers wanted "Jamie" (J.P. Morgan CEO Jamie Dimon) deals whereby the government would guarantee the most toxic assets of companies being purchased. Absent the subsidized buyout of Bear, there would have been no presumption of a government role as savior of any financial institutions, thus a more realistically priced market for banks in trouble.
What the episode teaches us is that while markets can ably prepare for and weather all manner of calamities, what they handle badly are opaque government policy stances whose changing nature causes information vacuums and panics like that of October 2008.I'd love to see the US Government finally give free market capitalism a try... Source for all Quotes: Global Economy Held Hostage by Lehman
