The ‘Wreckage’ from the 2008 Financial Crisis
Thanks to Don Boudreaux, GMU economics professor and publisher of the great economics blog, Cafe Hayek, for pointing to “this remarkably powerful essay” by Nicole Gelinas in the Summer 2010 issue of the Manhattan Institute’s City Journal. She writes:
“Over the past year, hundreds of authors have published books on the crisis. What becomes clear—often despite the authors’ own intentions—after reading ten of the most significant of these works is that the mainstream narrative is wrong. Over the two decades leading up to 2008, financial markets were anything but free. The nuts-and-bolts government infrastructure that free markets require to thrive—healthy fear of failure, respect for the rule of law, and fair rules for everyone—was crumbling. The crisis books make clear, too, that Washington’s extraordinary rescues of Wall Street have eroded much of what’s left of free-market infrastructure in finance. Worse, Congress’s efforts to reform the industry will do yet more damage. The next time the financial world implodes, it will hurt the economy even more severely.”
Perhaps best summing up the essay is the following paragraph:
“What Washington has created, then, is best summed up in Johnson and Kwak’s title. The “13 bankers” are the CEOs of the surviving big banks, whom President Obama summoned to the White House just weeks after his inauguration. Obama had convened the bankers to show the public that he was firmly in command of the institutions that the government had rescued. But what markets perceived was protection. “It was clear that the thirteen bankers needed the government,” Johnson and Kwak write. “But why did the government need the bankers?” In pumping trillions of dollars in cash and guarantees into the financial system without demanding change, Johnson and Kwak say, we risk creating a “uniquely American oligarchy”—one that will harm America’s growth, just as similar oligarchies have harmed other nations’ growth throughout history.”
The essay is well worth reading for a better understanding of the 2008 financial crisis that started us down the road to today’s economic morass. You may walk away wondering just what problem Congress was trying to solve with the recent passage of the Dodd-Frank financial reform bill.