The financial crisis was deemed a failure of capitalism. Yet very little is said of the government’s role in creating the crisis.  Commentators lament the deregulation, but omit specific regulations and policies that caused the crisis. Milton Friedman accurately noted that greed or economic self interest may be a fault of our economic system, but it  is no better and likely worse than political self interest that is held far less accountable.

In “Market Failure or Government Failure?“ Allan Meltzer writes in the Wall Street Journal

excerpts:

Without the policies followed by Fannie Mae and Freddie Mac—and the destructive changes in housing and mortgage policies, like authorizing subprime and Alt-A mortgages for impecunious borrowers—the crisis would not have happened.

Regulation often fails either because regulators are better at announcing rules than at enforcing them, or because the regulated circumvent the regulations….   This is because regulation is static, while markets are dynamic. If markets don’t circumvent costly regulation at first they will find a way later.

The new financial regulations, spearheaded by Sen. Chris Dodd (D., Conn.), only bring back too big to fail by authorizing a Systemic Risk Council headed by the Treasury secretary.The market is not perfect. It is run by humans who make mistakes. But the same humans run government where they make different, often more costly, mistakes for which the public pays. Capitalists make errors, but left alone, markets punish such errors.

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