We will probably be disagreeing on the causes of the 2008 crash for as long as we disagree on the great crash of 1929. From Real Clear Markets, Don’t Be Fooled, There Was Nothing ‘Financial’ About the 2008 Crisis by John Tamny:
In a market economy, failure is quite simply a sign of economic advance. It happily signals that the Blockbuster Videos of the world are regularly being replaced by Netflix. Failure is progress, and this includes the failure of banks. Goodness, Citigroup has been bailed out five times over the last twenty-five years. Can anyone seriously say propping up what the markets don’t want has been good for the economy?
It’s all a reminder that Lehman’s bankruptcy didn’t cause a “crisis” as much as the Bush administration’s foolish decision to bail out Bear Stearns months before created the perception in the marketplace that Lehman would be saved too. As such, investors weren’t prepared for the correct decision to let Lehman go. Put simply, Lehman was only earth-shaking insofar as prior government intervention turned what was healthy into a surprise. And having erred mightily in bailing out Bear, the Bush administration chose to make a bad situation much worse.
Indeed, in conjunction with the SEC it banned short-selling on 900 different financial stocks. Talk about pouring gasoline onto the fire. Seemingly missed by Administration officials is that short sellers are ultimately buyers. When short sellers are able to express their pessimism in the marketplace, a huge reserve of buying power is created when we remember that shorts can only take profits insofar as they buy back the shares sold short. Yet when the markets needed them most as both price givers and liquidity providers, the Bushies banned them.
After that, bailouts are not free. Governments don’t mis-allocate the money of others only to walk away. They offer up the money of others only to demand a more muscular role in how the saved operate. Ok, but the 20th century was a monument to the failure of central planning. Is it any wonder that future-seeing investors looked negatively on a return of excessive government intervention in commerce?
What can’t be stressed enough about what happened in 2008 is that for economies to grow and markets to rise, it’s necessary that the mediocre and lousy constantly be replaced by the good and brilliant. The latter is a statement of the supremely obvious, but also a reminder of why markets tanked so substantially ten years ago. As opposed to allowing natural market forces to fix what was wrong, the Bush administration, Bernanke Fed and U.S. Congress chose to intervene in crony fashion on the way to reversing what was necessary for economic and market recovery.
Mallaby’s book on Greenspan is very good. As bright as Greenspan is he was unable to see what was coming. It was a perfect storm of bad policies, bad regulations, and bad incentives. Every snowflake pleads innocent but it was still an avalanche.