The quasi-governmental institutions Fannie Mae and Freddie Mac guaranteed  mortgages, which Wall Street happily securitized once the credit rating agencies- which had been given a legally protected oligopoly by the government-declared them to be safe investments.  Government owned banks and municipalities across the world bought mortgage- backed securities like never before.

The central position of Fannie Mae and Freddie Mac reinforced confidence that the government would intervene if the housing market ran into trouble. The Fed’s safety net and the FDIC made banks dare to take big risks because they could privatize any gains but socialize any losses.

When home prices began to fall and the market no longer wanted mortgage-backed securities, the financial authorities stepped in and decreed that the banks had to write down the value of such securities radically, giving rise to several waves of panic selling. And when nobody wanted to finance the special companies anymore, the banks had to take them over, which put such a burden on their balance sheets that regulations forced them to pile up capital rather than make loans.  President Bush and other leading policy makers whipped up a panic to push through the laws they wanted. And just as the financial markets were more worried than ever because they did not know where the big risks were, the authorities banned shorting, thus depriving the markets of liquidity and information when they needed it most.

If this is laissez faire, then I would like to know what government intervention looks like.

If politicians, central bankers, and bureaucrats had intentionally tried to create a crisis, they would have been hard put to find more effective actions.  At each stage, the government inflated the bubble at least as eagerly as the most enthusiastic of Wall Street traders. The only difference was that the government’s pump was so much bigger.

From “Financial Fiasco” by Johan Norberg

HKO comments- yet the media has thoroughly convinced the ignorant and the gullible that this was a failure of capitalism.