A source of mild entertainment amid the financial carnage has been watching libertarians scurrying to explain how the global financial crisis is the result of too much government intervention rather than too little. One line of argumentAnother theory blames Fannie Mae and Freddie Mac for causing the trouble by subsidizing and securitizing mortgages with an implicit government guarantee. An alternative thesis is that past bailouts encouraged investors to behave recklessly in anticipation of a taxpayer rescue. casts as villain the Community Reinvestment Act, which prevents banks from "redlining" minority neighborhoods as not creditworthy.
There are rebuttals to these claims and rejoinders to the rebuttals. But to summarize, the libertarian apologetics fall wildly short of providing any convincing explanation for what went wrong. The argument as a whole is reminiscent of wearying dorm-room debates that took place circa 1989 about whether the fall of the Soviet bloc demonstrated the failure of communism. Academic Marxists were never going to be convinced that anything that happened in the real world could invalidate their belief system. Utopians of the right, libertarians are just as convinced that their ideas have yet to be tried, and that they would work beautifully if we could only just have a do-over of human history. Like all true ideologues, they find a way to interpret mounting evidence of error as proof that they were right all along...
There's enough blame to go around, but this wasn't just a collective failure. Three officials, more than any others, have been responsible for preventing effective regulatory action over a period of years: Alan Greenspan, the oracular former Fed chairman; Phil Gramm, the heartless former chairman of the Senate banking committee; and Christopher Cox, the unapologetic chairman of the Securities and Exchange Commission. Blame Greenspan for making the case that the exploding trade in derivatives was a benign way of hedging against risk. Blame Gramm for making sure derivatives weren't covered by the Commodity Futures Modernization Act, a bill he shepherded through Congress in 2000. Blame Cox for championing Bush's policy of "voluntary" regulation of investment banks at the SEC.
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According to Weisberg, editor in chief of Slate, the financial turmoil taking place worldwide is the fault of . . . libertarians. That must mean libertarians have been in a position to repeal generations of deep-seated government intervention in the financial and related industries, including the Federal Reserve system. That would have taken a long time, yet I don't recall reading that a libertarian revolution occurred in the United States. Surely it would have been in the newspapers. Hence, I must conclude that I, like old Rip, was slumbering all those years. I missed the revolution! It's the only possible explanation.
Unless Weisberg is wrong...
But did self-regulating financial markets exist and hence fail? It begs the question to assume this was the case. Weisberg has to prove it. He does not even try...
Weisberg makes the same mistake that superficial free-market advocates make. He believes that markets, to qualify as free in libertarian theory, need only be free of government restrictions (regulation). But that is only half the story. Truly free markets are also free of privilege -- guarantees, bailouts, Fed-provided liquidity, taxpayers as lenders of last resort, and so on. If you have unregulated markets but privileged, too-big-to-fail institutions, you do not have free markets. A market without full market discipline (the threat of losses and bankruptcy) is a contradiction in terms. So much for Cox's "voluntary regulation." No guarantees were withdrawn from the firms that were expected to regulate themselves. That's phony free-market-ism...
Weisberg is not the only writer who has declared the free market and libertarianism dead in the wake of the subprime collapse. One sees a certain desperation in such declarations -- as though those issuing them fear that people might start realizing that today's economic turmoil is not a market failure but a government failure.
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