Friday, October 24, 2008

Who murdered the financial system?

Who murdered the financial system?

by Swaminathan S. Anklesaria Aiyar

Dated: October 22, 2008

Leftists claim that the global financial crisis was caused by reckless
deregulation and greed. Rightists blame half-baked financial
regulations and perverse incentives. Actually, the financial sector is
deeply regulated, with major roles for both the state and markets. It
was not one or the other that failed but the combination.

The best metaphor for the mess comes from Jack and Suzy Welch, who
recall Agatha Christie's "Murder on the Orient Express." In this
novel, 12 people are suspects in a murder. And 12 turn out to be
guilty. What starts as a whodunit concludes as an everybody-dun-it.

In the same spirit, allow me to present the 12 murderers of the US
financial system.

1. The Federal Reserve Board. Alan Greenspan, Fed Governor in
1987-2006, was once hailed as a genius for keeping the US booming, but
is now called a serial bubble-maker. He presided over bubbles in
housing, credit, and stock markets. He said it was difficult to
identify asset bubbles in advance, so anti-bubble policies might be
anti-growth. It was better to let bubbles build, and sweep up after
they burst. Bernanke, like Greenspan, ignored the US housing bubble
till it burst.

2.US politicians. Envisioning a home for every American, regardless of
income, they provided excess implicit and explicit housing subsidies.
One law forced banks to lend to sub-prime poor borrowers. Legislators
created Fannie Mae and Freddie Mac, government-sponsored entities that
bought or underwrote 80% of all US mortgages, and enjoyed exemption
from normal regulations. Politicians ignored Greenspan's warning that
such a dominant role for two under-regulated giants posed a huge
financial risk.

3.Fannie Mae and Freddie Mac. They resisted regulation, and spent over
$ 2 million lobbying legislators against any tightening of rules. As
mortgagers of last resort they should have been especially prudent.
But they bought stacks of toxic mortgage paper—collateralized debt
obligations (CDOs)—seeking short-term profits that ultimately led to

4.Financial innovators. Their ideas provided cheap, easy credit, and
helped stoke the global economic boom of 2003-08. Securitisation of
mortgages provided an avalanche of capital for banks and mortgage
companies to lend afresh. Unfortunately the new instruments were so
complex that not even bankers realized their full risks. CDOs smuggled
BBB mortgages into AAA securities, leaving investors with huge
quantities of down-rated paper when the housing bubble burst.
Financial innovators created Credit Default Swaps (CDSs), which
insured bonds against default. CDS issues swelled to a mind-boggling $
60 trillion. When markets fell and defaults widened, those holding
CDSs faced disaster.

5.Regulators. All major countries had regulators for banking,
insurance and financial/ stock markets. These were asleep at the
wheel. No insurance regulator sought to check the runaway growth of
the CDS market, or impose normal regulatory checks like capital
adequacy. No financial regulator saw or checked the inherent risks in
complex derivatives. Leftists today demand more regulations, but these
will not thwart the next crisis if regulators stay asleep.

6.Banks and mortgage lenders. Instead of keeping mortgages on their
own books, lenders packaged these into securities and sold them. So,
they no longer had incentives to thoroughly check the creditworthiness
of borrowers. Lending norms were constantly eased. Ultimately, banks
were giving loans to people with no verification of income, jobs or
assets. Some banks offered teaser loans—low starting interest rates,
which reset at much higher levels in later years—to lure unsuspecting

7.Investment banks. Once, these institutions provided financial
services such as underwriting, wealth management, and assistance with
IPOs and mergers and acquisition. But more recently they began using
borrowed money—with leverage of up to 30 times—to trade on their own
account. Deservedly, all five top investment banks have disappeared.
Lehman Brothers is bust, Bear Stearns and Merrill Lynch have acquired
by banks, and Morgan Stanley and Goldman Sachs have been converted
into regular banks.

8.Rating agencies. Moody's and Standard and Poor's were not tough or
alert enough to spot the rise in risk as leverage skyrocketed. They
allowed BBB mortgages to be laundered into AAA mortgages through CDOs.

9.The Basle rules for banks. These international negotiated norms
provided harmonized regulatory checks on financial excesses across
countries. The first set of norms, Basle-I, was widely criticized as
too rigid and blunt. So countries agreed on Basle-II, which allowed
banks to use credit ratings and models based on historical record to
lower the risk-ratings of many securities. This dilution of norms led
to excesses everywhere. Iceland's banks went bust holding
loans/securities totaling 10 times its GDP. The dilution of
risk-rating in Basle-II helped inflate the financial bubble.

10.US consumers. Their savings used to be 6% of disposable income some
time ago, but more recently has been zero or even negative. They have
gone on a huge borrowing spree to spend far more than they earn. This
excess is reflected in huge, unsustainable US trade deficits.

11.Asian and OPEC countries. They undervalued their currencies to
stimulate exports and create large trade surpluses with the US. They
accumulated trillions in forex reserves, and put these mostly into
dollar securities. This depressed US interest rates, and further
fuelled borrowing there.

12.Everybody. Consumers, corporations, banks, politicians, the
media--indeed everybody-- was happy when housing prices boomed, stock
markets boomed, and credit became cheap and easily available. Bubbles
in all these areas grew in full public view. They were highlighted by
analysts, but nobody wanted to stop the lovely party. Everybody liked
easy money and rising asset prices. This trumped prudence across

So, forget the left-versus-right or regulations-versus-markets debate
on the financial crisis. States, institutions, markets and everybody
else was guilty. These actors will for some years don sackcloth and
ashes, adopt stiffer regulations, and listen to lectures on the
virtues of prudence and restraint. But after seven to ten years of the
next business upswing, I predict that we will once again have a new
generation of bubbles, evading whatever new checks have been put in
place. When everybody loves bubbles, they are both irresistible and

Friday, October 17, 2008

Where did all this money come from ?

Dear Sir,

The current ciris is in finanacial markets and tooted in sub-prime
mortages, as we all know. First of all, the money market has severe
govt intervention for several decades when fiat money was invented and
standard was abandoned.

Some centuries ago the currecy were issued by banks backed by their
gold or other assets. Hence the original name : bank notes. Govts all
over the world 'nationalised' the currecy issuing system and established
Central Banks with sole monopoly over issue of legal tender. This is first
of all certainly not free market in the real sense.

Secondly, the chronic defict financing of all nations over decades
pumped in more money into the sytem than the sytem could absorve
thru growth in real GDP. This is true of most economies.

And US is in a unique position : its currency USD is the reserve
currency and most of world trade occurs in USD. And hence the
entire world funds the US deficts which is in trillions and trillions
over the decades. US govt prints and pumps in trillions and
trillions of USD into the world economy over the decades. The
cumulative effect of all this should be taken into account while
blaming 'free markets' alone for all this mess.

I vividly remember our discussion about value and money ; and
about the functions of money : as a medium of exchange, measure of
value, etc ; Especially the function : 'store of value' ; The accumulated
'surplus values' or capital or whatever the term flows all around the sytem
in search of investemtn avenues and good return on investemnts.
As the term value is tricky to define and contantly fluctuates in
currency and debt markets, the cumulative effect of too much money
chasing too few goods or avenues for investment seems the crux of
all issues.

The old deficniton for inflation : "Too much money chasing too few
goods" : This seems to aptly apply for this financial market mess.
Combined with the govt gurantess of the twin giants for many trillions
(Freddie and Fannie), etc.

The word cheap money, easy credit, easy money, etc are all result of
this too much fiat money ? And as the govt is the both the issuer of
money and lender of last resot, it also controls the effective interest
rates by tinkering with Fed rates. All these are certainly govt intervention
and not free markets. Last year i read in major papers that the world
boom in equity and real estate is a function of global liquidity. Means ?

Excess liquidity ? And cyclic asset bubbles are always regular
happenings. What about the net amount of M4 or legal tender that
exists in the world economy at any given moment ?

The crisis is not in manufacturing or other services. Hence to term
all this as the failure of free enterprise capitalism is pre mature.

Anyway, I guess no one wants to get back to socialism. In US no one
seems to re-establism the, say : ICC (Interstate Commerce Commission)
which throttled many sectors like trucking (like our license raaj in India
as on date).

More later..


Tuesday, October 14, 2008

Holiest of all holies

Dear Freind,

I could not make myself very clear to you while arguing about free
market capitalism. The UN decleration of fundamental rights covers all
aspects of life.

and free enterprise is but a part of this declration : right to
property, right to do business and employ anybody thru volountary
free contracts ; and above all rule of the law and non-violation of
anyone's basic rights thru any means for any objectives.

All the rights of every human should not be violated by any other
individual or group or company or army or a nation or parliament or
statute or religious body, etc. that is the crux of it all. Violation of these
rights by any isim is wrong and

I consider these basic rights as the holiest of all holies in life.

Violation of property rights took place in Nandigram and elsewhere. Pls
compare how lands for mines and industires were / are acquired in the
West (say in Germany or Canda). but Gujarat SEZ land aquisition was
voluntary, free and fair.

Pls see my latest post :


Saturday, October 11, 2008

Pains of a slowing miracle economy

by : Swaminathan S. Anklesaria Aiyar

Pains of a slowing miracle economy

Dated: October 5, 2008

I am not usually a pessimist. But I predict that India will suffer a
lot of pain in the next 18 months, as the economy slows down along
with the current global slowdown.

The US, Europe and Japan are sinking into recession together. Forget
claims that India has decoupled from the US and can keep growing fast
regardless. India and most developing countries are indeed much less
dependent on the US economy than in the past. So, Indian growth will
be dented rather than smashed. GDP growth will slide from 9 % last
year to 7% this financial year, and to maybe 6% next year.

Now, 7% is a miracle growth rate by historical standards. You might
think that declining from super-miraculous to merely miraculous growth
cannot be particularly painful. You would be dead wrong. The direction
of change matters more than the absolute level. Rising from 5% to 7%
is blissful, but falling from 9% to 7% is painful. And a subsequent
tumble to 6% will be more painful still.

To appreciate why the direction of change matters so much, recall the
1990s. India went bust in 1991, reformed by globalising, and reaped
the reward of fast growth. GDP growth averaged 7.5% in the three-year
period 1994-97. India's growing integration with the world economy
enabled it to share in the global economic boom of those years.
Foreign institutional investors flooded into all emerging markets,
including India, sending stock market prices spiraling.

Indian optimists thought that miraculous growth was here to stay. But
along came the Asian financial crisis in 1997, and the Indian economy
slumped along with the global economy. Indian GDP growth averaged just
5.5% in the next five years.

Now, 5.5 % may not sound too bad, just a modest deceleration from the
7.5% of the preceding boom. Indeed, India's 5.5% at the time was one
of the fastest growth rates in the world. Yet the change in direction,
from acceleration to deceleration, caused enormous pain.

Industrial growth crashed in 1997-98, and barely limped forward for
years. Many industries had borrowed massively during the mid-1990s
boom to invest in world-class new plants, for which there was suddenly
no demand. Huge projects were abandoned unfinished, with companies
defaulting on mega-loans. These financial defaults brought the lending
institutions also to the verge of bankruptcy, from which they were
saved mainly by creative accounting and a friendly RBI. Medium and
small companies crashed along with their larger brethren. Employment
went into a tailspin. Stock markets crashed and companies stopped
repaying fixed deposits, so household investors suffered trauma.

The budgets of the central and state governments assumed steady growth
of revenue year after year. But the 1997 slowdown hit tax collections.
Meanwhile, a bumper Pay Commission award hugely inflated the wage
bills of central and state governments. So, governments, corporations,
employees and households investors were all sucked downward into a
whirlpool of distress. The only saving grace was the IT boom, sparked
by the global YK2 scare. But that turned out to be a bubble, and it
burst in 2001.

Difficult though these years were, they did not witness economic
collapse. India did not revert to the old Hindu rate of growth of 3.5%
witnessed in the three decades after independence. GDP growth in
1997-02 averaged a solid 5.5%. But the direction of change was
downward, not upward, and that was enough to cause widespread

I fear we are about to see a repetition of that process. As in the
1990s, a booming world economy first lifted Indian growth (and stock
markets) to new heights for several years, giving rise to the illusion
of permanency. As in the 1990s, the subsequent global slump is going
to cause an Indian slump too. As in the 1990s, the fiscal problems of
the government are going to be exacerbated by a Pay Commission award.

However, we are much better prepared for this downturn than in the
1990s. Our foreign exchange reserves are almost $ 300 billion,
cushioning our balance of payments. Corporations have not gone on a
borrowing spree paying 20% interest, as they did in the 1990s—they
have large cash reserves, modest debt-equity ratios, and interest
rates are much lower today. The banking system is in relatively good
shape today. The latest Pay Commission award this time is less onerous
than the 1997 one. Our savings rate has crossed 30%, and can keep
financing a healthy rate of investment. Infrastructural sectors like
telecom, power, roads, and ports will be only minimally affected by a

Nevertheless, pain will be widespread and sometimes deep. Income and
job opportunities will slacken, sometimes dramatically. Many companies
will suffer shrinkage or bankruptcy, especially small ones. Boom
sectors like transport, restaurants, trade, real estate and exports
will go into reverse gear. Credit will tighten, for consumers as well
as companies. Corporate profits will slump. The revenues of central
and state governments will fall, curbing their ability to alleviate
distress. The stock markets will fall further, and the Sensex may fall
below 10,000. Tighten your seat belts: we are running into rough

Thursday, October 02, 2008

An Open Letter to my Friends on the Left

An Open Letter to my Friends on the Left

Steven Horwitz
Department of Economics
St. Lawrence University
September 28, 2008

My friends,

In the last week or two, I have heard frequently from you that the
current financial mess has been caused by the failures of free markets
and deregulation. I have heard from you that the lust after profits,
any profits, that is central to free markets is at the core of our
problems. And I have heard from you that only significant government
intervention into financial markets can cure these problems, perhaps
once and for all. I ask of you for the next few minutes to, in the
words of Oliver Cromwell, consider that you may be mistaken. Consider
that both the diagnosis and the cure might be equally mistaken.

Consider instead that the problems of this mess were caused by the
very kinds of government regulation that you now propose. Consider
instead that effects of the profit motive that you decry depend upon
the incentives that institutions, regulations, and policies create,
which in this case led profit-seekers to do great damage. Consider
instead that the regulations that may have been the cause were
supported by, as they have often been throughout US history, the very
firms being regulated, mostly because they worked to said firms'
benefit, even as they screwed the rest of us. Consider all of this as
you ask for more of the same in the name of fixing the problem. And
finally, consider why you would ever imagine that those with wealth
and power wouldn't rig a new regulatory process in their favor.

One of the biggest confusions in the current mess is the claim that it
is the result of greed. The problem with that explanation is that
greed is always a feature of human interaction. It always has been.
Why, all of a sudden, has greed produced so much harm? And why only in
one sector of the economy? After all, isn't there plenty of greed
elsewhere? Firms are indeed profit seekers. And they will seek after
profit where the institutional incentives are such that profit is
available. In a free market, firms profit by providing the goods that
consumers want at prices they are willing to pay. (My friends, don't
stop reading there even if you disagree - now you know how I feel when
you claim this mess is a failure of free markets - at least finish
this paragraph.) However, regulations and policies and even the
rhetoric of powerful political actors can change the incentives to
profit. Regulations can make it harder for firms to minimize their
risk by requiring that they make loans to marginal borrowers.
Government institutions can encourage banks to take on extra risk by
offering an implicit government guarantee if those risks fail.
Policies can direct self-interest into activities that only serve
corporate profits, not the public.

Many of you have rightly criticized the ethanol mandate, which made it
profitable for corn growers to switch from growing corn for food to
corn for fuel, leading to higher food prices worldwide. What's
interesting is that you rightly blamed the policy and did not blame
greed and the profit motive! The current financial mess is precisely

No free market economist thinks "greed is always good." What we think
is good are institutions that play to the self-interest of private
actors by rewarding them for serving the public, not just themselves.
We believe that's what genuinely free markets do. Market exchanges are
mutually beneficial. When the law messes up by either poorly defining
the rules of the game or trying to override them through regulation,
self-interested behavior is no longer economically mutually
beneficial. The private sector then profits by serving narrow
political ends rather than serving the public. In such cases, greed
leads to bad consequences. But it's bad not because it's
greed/self-interest rather because the institutional context within
which it operates channels self-interest in socially unproductive

This, my friends, is exactly what has brought us to the mess we are now in.

To call the housing and credit crisis a failure of the free market or
the product of unregulated greed is to overlook the myriad government
regulations, policies, and political pronouncements that have both
reduced the "freedom" of this market and channeled self-interest in
ways that have produced disastrous consequences, both intended and
unintended. Let me briefly recap goverment's starring role in our
little drama.

For starters, Fannie Mae and Freddie Mac are "government sponsored
enterprises". Though technically privately owned, they have particular
privileges granted by the government, they are overseen by Congress,
and, most importantly, they have operated with a clear promise that if
they failed, they would be bailed out. Hardly a "free market." All the
players in the mortgage market knew this from early on. In the early
1990s, Congress eased Fannie and Freddie's lending requirements (to
1/4th the capital required by regular commercial banks) so as to
increase their ability to lend to poor areas. Congress also created a
regulatory agency to oversee them, but this agency also had to reapply
to Congress for its budget each year (no other financial regulator
must do so), assuring that it would tell Congress exactly what it
wanted to hear: "things are fine." In 1995, Fannie and Freddie were
given permission to enter the subprime market and regulators began to
crack down on banks who were not lending enough to distressed areas.
Several attempts were made to rein in Fannie and Freddie, but Congress
didn't have the votes to do so, especially with both organizations
making significant campaign contributions to members of both parties.
Even the New York Times as far back as 1999 saw exactly what might
happen thanks to this very unfree market, warning of a need to bailout
Fannie and Freddie if the housing market dropped.

Complicating matters further was the 1994 renewal/revision of the
Community Reinvestment Act of 1977. The CRA requires banks to to make
a certain percentage of their loans within their local communities,
especially when those communities are economically disadvantaged. In
addition, Congress explicitly directed Fannie and Freddie to expand
their lending to borrowers with marginal credit as a way of expanding
homeownership. What all of these did together was to create an
enormous profit and political incentives for banks and Fannie and
Freddie to lend more to riskier low-income borrowers. However
well-intentioned the attempts were to extend homeownership to more
Americans, forcing banks to do so and artificially lowering the costs
of doing so are a huge part of the problem we now find ourselves in.

At the same time, home prices were rising making those who had taken
on large mortgages with small down payments feel as though they could
handle them and inspiring a whole variety of new mortagage
instruments. What's interesting is that the rise in prices affected
most strongly cities with stricter land-use regulations, which also
explains the fact that not every city was affected to the same degree
by the rising home values. These regulations prevented certain kinds
of land from being used for homes, pushing the rising demand for
housing (fueled by the considerations above) into a slowly responding
supply of land. The result was rapidly rising prices. In those areas
with less stringent land-use regulations, the housing price boom's
effect was much smaller. Again, it was regulation, not free markets,
that drove the search for profits and was a key contributor to the
rising home prices that fueled the lending spree.

While all of this was happpening, the Federal Reserve, nominally
private but granted enormous monopoly privileges by government, was
pumping in the credit and driving interest rates lower and lower. This
influx of credit further fueled the borrowing binge. With plenty of
funds available, thanks to your friendly monopoly central bank (hardly
the free market at work), banks could afford to continue to lend
riskier and riskier.

The final chapter of the story is that in 2004 and 2005, following the
accounting scandals at Freddie, both Freddie and Fannie paid penance
to Congress by agreeing to expand their lending to low-income
customers. Both agreed to acquire greater amounts of subprime and
Alt-A loans, sending the green light to banks to originate them. From
2004 to 2006, the percentage of loans in those riskier categories grew
from 8% to 20% of all US mortgage originations. And the quality of
these loans were dropping too: downpayments were getting progressively
smaller and more and more loans carried low starter interest rates
that would adjust upward later on. The banks were taking on riskier
borrowers, but knew they had a guaranteed buyer for those loans in
Fannie and Freddie, back, of course, by us taxpayers. Yes, banks were
"greedy" for new customers and riskier loans, but they were responding
to incentives created by well-intentioned but misguided government
interventions. It is these interventions that are ultimately
responsible for the risky loans gone bad that are at the center of the
current crisis, not the "free market."

The current mess is thus clearly shot through and through with
government meddling with free markets, from the Fed-provided fuel to
the CRA and land-use regulations to Fannie and Freddie creating an
artificial market for risky mortgages in order to meet Congress's
demands for more home-ownership opportunities for low-income families.
Thanks to that intervention, many of those families have not only lost
their homes, but also the savings they could have held onto for a few
more years and perhaps used to acquire a less risky mortgage on a
cheaper house. All of these interventions into the market created the
incentive and the means for banks to profit by originating loans that
never would have taken place in a genuinely free market.

It is worth noting that these regulations, policies, and interventions
were often gladly supported by the private interests involved. Fannie
and Freddie made billions while home prices rose, and their CEOs got
paid lavishly. The same was true of the various banks and other
mortgage market intermediaries who helped spread and price the risk
that was in play, including those who developed all kinds of fancy new
financial instruments all designed to deal with the heightened risk of
default the intervention brought with it. This was a wonderful game
they were playing and the financial markets were happy to have Fannie
and Freddie as voracious buyers of their risky loans, knowing that US
taxpayer dollars were always there if needed. The history of business
regulation in the US is the history of firms using regulation for
their own purposes, regardless of the public interest patina over the
top of them. This is precisely what happened in the housing market.
And it's also why calls for more regulation and more intervention are
so misguided: they have failed before and will fail again because
those with the profits on the line are the ones who have the resources
and access to power to ensure that the game is rigged in their favor.

I know, my friends, that you are concerned about corporate power. So
am I. So are many of my free-market economist colleagues. We simply
believe, and we think history is on our side, that the best check
against corporate power is the competitve marketplace and the power of
the consumer dollar (framed, of course, by legal prohibitions on force
and fraud). Competition plays mean, nasty corporations off against
each other in a contest to serve us. Yes, they still have power, but
its negative effects are lessened. It is when corporations can use the
state to rig the rules in their favor that the negative effects of
their power become magnified, precisely because it has the force of
the state behind it. The current mess shows this as well as anything
ever has, once you realize just what a large role the state played. If
you really want to reduce the power of corporations, don't give them
access to the state by expanding the state's regulatory powers. That's
precisely what they want, as the current battle over the $700 billion
booty amply demonstrates.

This is why so many of us committed to free markets oppose the
bailout. It is yet another example of the long history of the private
sector attempting to enrich itself via the state. When it does so,
there are no benefits to the rest of us, unlike what happens when
firms try to get rich in a competitive market. Moreover, these same
firms benefited enormously from the regulatory interventions they
supported and that harmed so many of us. The eventual bursting of the
bubble and their subsequent losses are, to many of us, their just
desserts for rigging the game and eventually getting caught. To reward
them again for their rigging of the game is not just morally
unconscionable, it is very bad econonmic policy, given that it sends a
message to other would-be riggers that they too will get rewarded for
wreaking havoc on the US economy. There will be short-term pain if we
don't bailout these firms, but that is the hangover price we pay for
15 years or more of binge lending. The proposed bailout cannot prevent
the pain of the hangover; it can only conceal it by shifting and
dispersing it among the taxpayers and an economy weakened by the
borrowing, taxing, and/or inflation needed to pay for that $700
billion. Better we should take our short-term pain straight up and
clean out the mistakes of our binge and then get back to the business
of free markets without creating an unchecked Executive branch
monstrosity trying to "save" those who profited most from the binge
and harming innocent taxpayers in the process.

What I ask of you my friends on the left is to not only continue to
work with us to oppose this or any similar bailout, but to consider
carefully whether you really want to entrust the same entity who is
the predominant cause of this crisis with the power to attempt to cure
it. New regulatory powers may look like the solution, but that's what
people said when the CRA was passed, or when Fannie and Freddie were
given new mandates. And the very firms who are going to be regulated
will be first in line to determine how those regulations get written
and enforced. You can bet which way that game is going to get rigged.

I know you are tempted to think that the problems with these
regulations are the fault of the individuals doing the regulating. If
only, you think, Obama can win and we can clean out the corrupt
Republicans and put ethical, well-meaning folks in place. Think again.
For one thing, almost every government intervention at the root of
this crisis took place with a Democratic president or a
Democratic-controlled Congress in place. Even when the Republicans
controlled Congress, President Clinton worked around it to change the
rules to allow Fannie and Freddie into the higher-risk loan market. My
point here is not to pin the blame for the current crisis on the
Democrats. That blame goes around equally. My point is that hoping
that having the "right people" in power will avoid these problems is
both naive and historically blind. As much as corporate interests were
relevant, they were aided and abetted, if unintentionally, by
well-meaning attempts by basically good people to do good things.The
problem is that there were a large number of undesirable unintended
consequences, most of which were predictable and predicted. It doesn't
matter which party is captaining the ship: regulations come with
unintended consequences and will always tend to be captured by the
private interests with the most at stake. And history is full of cases
where those with a moral or ideological agenda find themselves in
political fellowship with those whose material interests are on the
line, even if the two groups are usually on opposite sides. This is
the famous "Baptists and Bootleggers" phenomenon.

If you've made it this far, I am most grateful. Whether or not you
accept the whole argument I've laid out here, I do ask one thing of
you: the story I told at the start of the role of government
intervention in this mess is true, whatever your grander conclusions
about the causes and cures are. Even if you don't buy my argument that
more regulation isn't the cure, to blame this mess on "the free
market" should now strike you as an obvious falsehood and I would
hope, in the spirit of fair play, that you would stop making that
claim as you speak and write about the ongoing events of the last two
weeks. We can disagree in good faith about what to do next, and we can
disagree in good faith about the degree to which government
intervention caused the problems, but blaming a non-existent free
market for a crisis that clearly was to some extent the result of
government's extensive interventions in that market is unfair. So if I
have persuaded you of nothing else, I hope deeply that I have
persuaded you of that.

In the end, all I can ask of you is that you continue to think this
through. Explaining this crisis by greed won't get you far as greed,
like gravity, is a constant in our world. Explaining it as a failure
of free markets faces the obvious truth that these markets were far
from free of government. Consider that you may be mistaken. Consider
that perhaps government intervention, not free markets, caused
profit-seekers to undertake activities that harmed the economy.
Consider that government intervention might have led banks and other
organizations to take on risks that they never should have. Consider
that government central banks are the only organizations capable of
fueling this fire with excess credit. And consider that various
regulations might have forced banks into bad loans and artificially
pushed up home prices. Lastly, consider that private sector actors are
quite happy to support such intervention and regulation because it is

Those of us who support free markets are not your enemies right now.
The real problem here is the marriage of corporate and state power.
That is the corporatism we both oppose. I ask of you only that you
consider whether such corporatism isn't the real cause of this mess
and that therefore you reconsider whether free markets are the cause
and whether increased regulation is the solution.

Thanks for reading.