QUORA: ‘What were the primary causal factors in the financial crisis of 2007-08, excluding real estate and related financial products?’

 QUORA *: ‘What were the primary causal factors in the financial crisis of 2007-08, excluding real estate and related financial products?’

I posted this answer:

This is a very good question. It implies that we must distinguish between primary and secondary causes. That is the correct approach. 

The government was the primary cause. The point is not to let bad-acting banks off the hook. But the role of private banks is a secondary cause. The fact is that the government is the only institution with the capability to spread bad lending and a huge housing bubble and infect the entire economy. Individual banks set their own standards. None can force them on others. Bad lending by an individual bank hurts that bank, and possibly the employees and customers directly associated with that bank. The government is entirely different. Its edicts transcend the diversity of individual bank lending policies via its massive, coercive central planning regulatory apparatus. It’s financial controls extend through the entire economy. So, bad government policy affects entire industries nationwide, and eventually the entire economy. As one who studied the crisis observed, “The Great Recession could not have happened without the vast web of government subsidies and controls that distorted financial markets.”

The 2007-08 crisis resulted from a perfect storm of government intervention geared toward carrying out the government’s deliberate “affordable housing” policies under the Bill Clinton and George W. Bush Administrations, both of which sought to raise the U.S homeownership rate. Don’t expect the political class and its statist allies in the press and academia to own up to their own culpability. They’re perfectly content to deflect blame elsewhere, mainly to private bank “greed” and the non-existent free market. 

Jack Crawford recommended a good book by John A. Allison, The Financial Crisis and the Free Market Cure. I would also recommend Hidden in Plain Sight: What Really Caused the World's Worst Financial Crisis—and Why It Could Happen Again by Peter J. Wallison. A more condensed version of events is provided in an article by Don Watkins, FREE MARKETS DIDN’T CREATE THE GREAT RECESSION.

Related Reading:

The ‘Wild West’ of Government Regulation Caused the 2008 Financial Meltdown

The Nature and the Origin of the Subprime Mortgage Crisis—San José State University

Department of Economics

The subprime mortgage crisis had its origin in the program the directors of Fannie Mae initiated in the late 1990's to pursue social welfare goals rather than maintain financial viability.

 

The Housing Boom and Bust—by Thomas Sowell

2008: Who Really ‘Got Away With Murder?’

Altruism: The Moral Root of the Financial Crisis—Richard M. Salsman for The Objective Standard, Vol. 4. No. 1.

Why No Wall Street Prosecutions? The Villains Are All In Washington

Finally, Some Positive Recognition for the Statists' Favorite Whipping Boy, Wall Street

* [Quora is a social media website founded by two former Facebook employees. According to Wikipedia:

Quora is a question-and-answer website where questions are created, answered, edited and organized by its community of users. The company was founded in June 2009, and the website was made available to the public on June 21, 2010.[3]Quora aggregates questions and answers to topics. Users can collaborate by editing questions and suggesting edits to other users' answers.[4]

You can also reply to other users’ answers.]

Memo to the NJ Star-Ledger: Obama Didn’t Cause the Recovery

A NewJersey Star-Ledger editorial, Don't mess with economic progress, President Trump, opens with:

This might come as a disappointment to some, but the trajectory of America's return path to greatness was well established by the time Donald Trump and his dizzy economic vision for the country came down that escalator.

And then asserts:

One indisputable takeaway is that the shadow of the great recession was lifted by his predecessor: The median income - that's the household income that sits in the middle of the salary ladder - rose 3.2 percent last year (to $59,039), after rising 5.2 percent in 2015.

The S-L editorial goes on to blast Trump for proposing cuts in some welfare programs, saying that this will result in more people in poverty.

The implication of this editorial is that the government is responsible for a strong economy, and that the only way for anyone to get out of poverty is not to work her way up, but to get a handout of unearned goodies. This is upside-down. An economy advances because human beings, by their nature, must work to produce the goods necessary to sustain their lives. An economy therefore has a natural tendency to grow, without government “help,” as long as people are left free to produce and trade.

A government doesn’t cause economic growth. Individual initiative does. Government’s can hamper growth. But they do not cause it. And hamper growth is exactly what Obama and previous administrations have been doing. In the past 20+ years, we saw a perfect storm of government interference—regulatory, monetary, and politicians’ affordable housing crusades under Clinton and G.W. Bush—inflate the biggest housing bubble in history, bust it, and cause the worst financial crisis is history. Then we saw an avalanche of regulation and spending as Obama’s “cure’ for the resulting Great Recession—and instead of a roaring job-filled recovery like the ones following the 1920-21 depression or the 1980-82 recession, we got a mini-version of the 1930s; not as bad, but still the most anemic recovery on record which took a decade for incomes to finally catch up. Obama didn’t lift “the shadow of the great recession.” He simply smothered the recovery.

Add to this the burgeoning welfare state, which disincentivizes work and advancement. Contrary to Leftist dogma, redistribution of wealth doesn’t alleviate poverty. It merely turns low income people into parasites by locking them into perpetual handouts. The Star-Ledger itself acknowledged the economy-crippling effects of perpetual handouts. In a 2/6/14 editorial titled “ObamaCare's collateral damage”, the Star-Ledger wrote that their is. . .

. . . a fundamental problem in America’s approach to its welfare state. [L]ow-wage workers will lose subsidies as their earnings increase, giving them less incentive to work hard and climb the income ladder. Much of what they gain in earnings, in other words, they will lose in subsidies.

This is a problem liberals need to face squarely. . .

That’s not Trump. That’s not a Right Wing think tank. That’s the liberal Star-Ledger in a fit of candor. And every word of it was and is true. And yet every cut in subsidies—even “cuts” that are really reductions in spending growth—are savagely attacked as “heartless”—even though the welfare cuts are a drop in the bucket compared to the massive growth in government redistribution spending and deficits since 2000. I’m still waiting for liberals to face the “fundamental problem” of the welfare state.

Productive individuals, not government or politicians, cause prosperity and reduce poverty. A government is vital to the establishment of the social conditions that lead to prosperity, but only to the extent to which its laws protect individual rights--especially the right to earn a living. Property rights, free trade, production, policing markets against force, fraud, and deception—the rule of objective law—are vital to liberating individuals to work and prosper. But when the government turns to massive economic regulation and redistribution of wealth, you get what we’ve had the past two decades—a boom-bust-barely above stagnation recovery.

I disagree with Trump on many issues. But if he can reduce the regulatory burden while reigning in the welfare state, he will have done real good for the productive individuals and the incentive for upward mobility that are the real drivers of economic progress.

Related Reading:

"Trickle-Down Economics": Anti-Capitalists' Insulting Portrayal of the "Common Man

Hidden in Plain Sight: What Really Caused the World's Worst Financial Crisis—and Why It Could Happen Again—by Peter J. Wallison

The ‘Wild West’ of Government Regulation Caused the 2008 Financial Meltdown

On the occasion of her “farewell” address,” outgoing Federal Reserve Board Chairwoman Janet Yellen warned against repeal or major roll-back of the Dodd-Frank regulatory bill passed as an alleged “fix” for the cause of the 2008 financial crisis.

The New Jersey Star-Ledger piled on in support of Yellen. In its Central bank to Trump: Keep your tiny hands off Dodd-Frank editorial, the S-L chastised President Trump and Republicans for launching a “deregulation bonfire.” Building on the statists’ lie about the causes of the crisis, the S-L announced, with an apparent straight face, “But the Wild West days of hands-off central banking - which peaked during [the crisis] - should remain dead and buried.”

I left these comments:

When, in recent decades, did we ever see “Wild West days of hands-off central banking?”

When we think of the Wild West, we think of lawlessness, where people with guns, usually outlaws, “governed” at whim.

Well, that’s a good description of the financial regulatory regime of then, and today. After all, who has the guns? The regulators, not the banks. And they used them to create the conditions that led to the financial crisis. Contrary to the Big Lie being peddled by statists and government apologists, financial regulation—every bit of which is backed by the armed power of the state—was at a peak when the crisis hit. Government spending on financial regulation, adjusted for inflation, tripled after 1980, peaking in 2007. Keep in mind that three big new regulatory bills were passed under Bush, the Privacy Act, Patriot Act, and Sarbanes-Oxley. That massive regulatory apparatus was put to use imposing ever-weaker mortgage standards to force banks to comply with the politicians' affordable housing goals under Clinton and Bush. This was aided and abetted by Fannie and Freddie, which were ordered by both Clinton and Bush to massively ramp up purchases of subprime mortgages.

As to central banking, the Federal Reserve under Greenspan and Bernanke inflated the biggest ever asset inflation, the 1997-2007 housing bubble, which distorted incentives and caused a massive malinvestment of capital. Is it any wonder that a Fed Chairwoman would hide her own agency’s leading culpability in order to shift blame to private banks?

Yellon left out most of the “whole truth.” The years leading up to the financial crisis certainly look like “Wild West days”—a Wild West of political, regulatory, and monetary interference in the housing and mortgage markets. Banks that acted badly were a secondary cause. The government was the primary cause—which is why I believe Dodd-Frank should be repealed in its entirety: It’s based on a lie. But, the whole truth is out there. It is grotesquely dishonest to assert that it was a free “Wild West” market that failed, when in fact it was a heavily regulated market that failed. It is therefore grossly unfair to burden the entire industry with another layer of suffocating controls for the wrongdoing of the few banks (like Angelo Mozilo’s Countrywide Financial) that did deliberately exacerbate the problem: This amounts to punishing the innocent many for the wrongdoing of the few.

To protect the guilty, Dodd-Frank was sold on a lie—the deliberate mis-identification of the fundamental causes of the financial crisis. And now the guilty will have even more Wild West power! Congress should start over, and start by not only looking at the secondary causes but also at the government’s—the politicians’ own—primary role.

Related Reading:

FREE MARKETS DIDN’T CREATE THE GREAT RECESSION—Watkins

Myth: The Great Recession was caused by free-market policies that led to irrational risk taking on Wall Street.

Reality: The Great Recession could not have happened without the vast web of government subsidies and controls that distorted financial markets.

The Nature and the Origin of the Subprime Mortgage Crisis—San José State University

Department of Economics

The subprime mortgage crisis had its origin in the program the directors of Fannie Mae initiated in the late 1990's to pursue social welfare goals rather than maintain financial viability.

The Housing Boom and Bust—by Thomas Sowell

The Financial Crisis and the Free Market Cure—by John A. Allison

Where Does Valid Law End and Regulation Begin?

Hidden in Plain Sight: What Really Caused the World's Worst Financial Crisis—and Why It Could Happen Again—by Peter J. Wallison

Central Planning: The True Economic Chaos by Brian Belfour for FEE

2008: Who Really ‘Got Away With Murder?’

Back when Congress was formulating its partial roll-back of the financial regulatory bill nicknamed Dodd-Frank, the New Jersey Star-Ledger peddled the classic statist line (lie) about lack of regulation causing the 2008-10 economic crisis. Wrote the Star-Ledger in Wall St. bankers 'got away with murder.' Now GOP wants to reward them,

The so-called "Financial Choice Act," co-sponsored by Rep. Tom MacArthur (R-3rd Dist.), not only pretends Wall Street's naked swindle never occurred, it feeds a deregulation bonfire that could allow the banking industry to explode in another fireball of freedom.

“Fireball of freedom.” That’s the way the statist Left views private individuals exercising their right to act on their own judgement. Need I say more? I did, in these comments:

This is a bigoted, racist-like broad swipe against “Wall Street.” Not a word about the people who control the unfree lending market, government officials. Statist apologists will apparently never stop lying about the genesis of the 2008 financial meltdown.

The Dodd-Frank law was sold on an outright lie, a complete and deliberate misidentification of the causes of the 2008 catastrophe. The banking industry consists of a diverse universe of thousands of lenders. In a free market, the mistakes of one bank won’t affect other banks. Those that make bad loans pay the price. Those with sound lending standards reap the rewards.

How is it, then, that an entire lending sector, the gargantuan home mortgage industry, can all be oriented in the same direction—the direction of sub-prime mortgage lending? The only institution capable of infecting the entire banking and financial system with bad lending is the federal government, through it massive regulatory labyrinth. Government regulation is the common thread. And that’s exactly what happened. It started in the 1990s. The housing boom and bust, financial meltdown, and Great Recession were engineered from the Washington political establishment—a perfect storm of government intervention.

From the Fed to the FDIC, CRA, Fannie & Freddie and the implied federal mortgage guarantees, the legally protected rating agency cartel, FHA, SEC, FASB accounting regulations, and on and on, the massive federal regulatory apparatus was geared to enforce the politicians’ bipartisan affordable housing crusade. There is no way some mythical Great and Powerful Oz labeled “Wall Street” could have done this. Bad lending by Wall Street “swindlers,” which in fact were very few in number, would have quickly evaporated but for the Clinton/Bush mandates for Fannie and Freddie to buy up the bad mortgages and the regulatory pressure to lower lending standards, all built upon the Fed-engineered mother-of-all housing price bubbles. Whatever financial firms acted badly—and many did, such as Angelo Mozilo’s Countrywide and IndyMac Bank—private sector culpability was a derivative effect, not a primary cause. It was not any “fireball of freedom” that unleashed the sub-prime disease. What freedom existed in finance? The culprits were the little men behind the curtain—the tools of the political class’s affordable housing swindlers, the wizards holding the levers of control over the financial industry.

The primary causes of the meltdown were government initiated, and have been well documented in books published by experts such as Thomas Sowell, John A. Allison, and Peter J. Wallison. Many articles have been written outlining the true nature and causes of the economic destruction, including “Free Markets Didn’t Create the Great Recession” by Don Watkins. But the statists refuse to acknowledge their own primary culpability, and instead opted to shield themselves from blame, protect their own power, and expand their control over the economy—with the help of “progressive” hacks in the media such as the statist editorialists of the Star-Ledger.

We don’t need more protection from Wall Street and financial institutions. We need protection from our “protectors”—and to hold the real political culprits accountable, starting with Barney Frank, Chris Dodd, Alan Greenspan, Ben Bernanke, Franklin Raines, Bill Clinton, and George W. Bush. We need to ignore “fake news” editorials like this one, and go back to the proverbial drawing boards. Repeal Dodd-Frank. Get honest with Americans. And then enact, revise, or repeal laws that will actually prevent such politically engineered crises from ever happening again, while retaining long-standing fraud protections but otherwise liberating the financial business to do its job of providing capital, savings and investment opportunities, and consumer financing for entrepreneurs and so-called “working families”—i.e., productive people—alike.

Related Reading:

Finally, Some Positive Recognition for the Statists' Favorite Whipping Boy, Wall Street

The Nature and the Origin of the Subprime Mortgage Crisis—San José State University
Department of Economics

The subprime mortgage crisis had its origin in the program the directors of Fannie Mae initiated in the late 1990's to pursue social welfare goals rather than maintain financial viability.

Altruism: The Moral Root of the Financial Crisis—Richard M. Salsman for The Objective Standard, Vol. 4. No. 1.

Why No Wall Street Prosecutions? The Villains Are All In Washington

The Lie Behind the Left’s Drive to Save Dodd-Frank

The Trump Administration’s initiative to reduce economic regulations includes talk of repealing the Dodd-Frank bank regulation bill dumped on the financial sector in response to the 2008 financial crisis. Predictably, the statists are circling the wagons to defend the law, engaging in the usual kinds of hysterical language and distortions Leftist politicians usually use whenever anyone suggests any reduction in taxes or regulations.

One aspect of the law in particular is a darling of the statists. The Consumer Financial Protection Bureau (CFPB) is of particular concern to the statist because of its enormous controlling power over banks. In a New Jersey Star-Ledger guest column, Trump's plan to kill consumer safeguards will be catastrophic to N.J.'s working families, Beverly Brown Ruggia, the Financial Justice Advocate for the “progressive” New Jersey Citizen Action (NJCA), charged . . .

Once again, House Republicans have taken up hatchet and torch with the intention of slashing and burning a crucial governmental institution meant to provide protections and safeguards for the wellbeing of all citizens.

The so-called "Choice Act" which, the House Committee on Financial Services Chair, Jeb Hensarling (R-Texas 5th Dist.) is eager to move through committee and to a vote, is to Dodd Frank and the Consumer Financial Protection Bureau (CFPB) what the AHCA is to the Affordable Care Act.

This legislation, which President Trump supports, would tear out the legal roots of the CFPB. If enacted, the bill would burn through the bureau's authority and independence to stop bad actors from breaking the law, leaving Wall Street banks and predatory lenders free to rip off consumers with impunity.

New Jersey is home to two members of the House Committee on Financial Services, Rep. Tom MacArthur (R-3rd Dist.) and Rep. Josh Gottheimer (D-5th Dist.), who are hearing this bill this week, have an obligation to the citizens of New Jersey to stop this bill in its tracks.

This destructive legislation proposed by House Republicans would gut the one entity that is holding Wall Street and financial institutions accountable for unfair, deceptive and abusive practices.

I left these comments, somewhat expanded and edited for clarity, with particular focus on the last sentence:

This destructive legislation proposed by House Republicans would gut the one entity that is holding Wall Street and financial institutions accountable for unfair, deceptive and abusive practices.

This is an outright lie. Laws against fraud and deception have long existed. Prosecutions following the 1999 accounting scandals involving Enron and other companies and their executives were based on laws that pre-existed even the Sarbanes-Oxley anti-fraud laws. The real deception is that Dodd-Frank was sold based on a deliberate mis-identification of the fundamental causes of the financial crisis and Great Recession.

The only institution capable of infecting the entire banking and financial system with bad lending is the federal government, through it massive regulatory labyrinth. And that’s exactly what happened. It started in the 1990s. The housing boom and bust, financial meltdown, and Great Recession were engineered from the Washington political establishment—a perfect storm of government intervention.

From the Fed to the FDIC, CRA, Fannie & Freddie and their implied federal mortgage guarantees, the legally protected rating agency cartel, FHA,  SEC, FASB accounting regulations, and on and on, the massive federal regulatory apparatus was geared to enforce the politicians’ affordable housing crusade. There is no way the “Wall Street and financial institutions” could have done this. Whatever financial firms acted badly—and many did, such as Angelo Mozilo’s

Countrywide and IndyMac Bank—private sector culpability was a derivative effect, not a primary cause.

The primary causes of the meltdown were government initiated, and have been well documented in books published by experts such as Thomas Sowell, John A. Allison, and Peter J. Wallison. Many articles have been written outlining the true nature and causes of the economic destruction, including “Free Markets Didn’t Create the Great Recession” by Don Watkins. But the statists refused to acknowledge their own primary culpability, and instead opted to shield themselves from blame, protect their own power, and expand their control over the economy—with the help of “progressive” hacks in the media such as the statists over at the NJCA.

We don’t need more protection from Wall Street and financial institutions. We need protection from our protectors—and to hold the real political culprits accountable, starting with Barney Frank, Chris Dodd, Alan Greenspan, Ben Bernanke, Franklin Raines, Bill Clinton, and George W. Bush. We need to ignore articles like this on, and go back to the proverbial drawing boards. Repeal Dodd-Frank. Get honest with Americans. And then enact, revise, or repeal laws that will actually prevent such politically engineered crises from ever happening again, while retaining long-standing fraud protections but otherwise liberating the financial business to do its job of providing capital, savings and investment opportunities, and consumer financing for entrepreneurs and so-called “working families”—i.e., productive people—alike.

Related Reading:

Finally, Some Positive Recognition for the Statists' Favorite Whipping Boy, Wall Street

Why No Wall Street Prosecutions? The Villains Are All In Washington

How Government Regulation is Corrupt by its Very Nature

Where Does Valid Law End and Regulation Begin?

Finally, Some Positive Recognition for the Statists' Favorite Whipping Boy, Wall Street

Donald Trump has been telling us for weeks that he will repeal (or revise or whatever) the Dodd-Frank regulatory regime put in place after the financial crisis and Great Recession. Who knows how that will work out.

But related to the current debate over changes to Dodd-Frank regulations is the kind of piece we don’t often see these days—one that praises Wall Street. In a Los Angeles Times op-ed, Your way of life would not be remotely possible without Wall Street, William Cohan starts out:

At $500 million in box office revenue and counting, we sure love Disney’s new movie “Beauty and the Beast.” With more than 1 billion sold, we sure love Apple’s iPhone. The same goes for Netflix, Chevy pickups, wide-screen televisions and grocery store aisles stocked high with fresh fruit and vegetables.

But for some reason, we hate the one entity that brought all these things within reach of most Americans: Wall Street.

Our way of life would not be remotely possible without the interstitial role played by Wall Street. It’s the left ventricle of capitalism. Yet Wall Street has become shorthand for everything that is wrong with the American economic system.

Cohan doesn’t give Wall Street a complete pass. Nor should he. He believes that Wall Street “exacerbated the 2008 financial crisis and was not held accountable.” Hence, politicians from Elizabeth Warren to Donald Trump have villainized Wall Street, “[O]ne politician after another,” Cohan observes, “has lambasted Wall Street for every imaginable evil.”

But he then returns to his main point:

With so much sanctimony on the national stage, it’s easy to hate bankers. But if we want to actually fix what’s wrong with Wall Street, we will need to stop mindlessly villainizing it.

In the most basic terms: Wall Street provides capital at a fair price to people who want it, by borrowing it from people who have it and want to invest it. It’s a simple service, and without it, we might as well go back to the Middle Ages, when people never ventured far from their tiny villages and spent their days worrying about their next meal.

Wall Street put the Internet at our collective fingertips. It’s the reason more than 160 million Americans have credit cards and access to an unsecured line of credit anytime they may want to use it. It democratized jet travel, which now allows average people to get halfway around the world in the time it used to take a fisherman to get his cod to market. Few people who have these things would be willing to give them up.

It’s refreshing to see some honesty and objectivity brought into the debate over financial regulations. But it’s not enough. Cohan is right that some on Wall Street were a contributing cause of the financial crisis. But was Wall Street the primary cause? I think Cohan falls short in not emphasizing the government's primary role in fomenting the housing bubble and bust and its role in spreading the contagion of bad mortgages throughout the investment community and ultimately the “main street” economy. Aside from pointing to the government’s “too-big-to-fail” policy, he ignores the Washington politicians’ “affordable housing crusade” and the related perfect storm of regulatory interference in the mortgage and housing markets to back up their crusade.

Through Fannie Mae and Freddie Mac, to the Federal Reserve, to the FDIC, to the Community Reinvestment Act, to mark-to-market accounting rules, and on and on, the government pushed and prodded and coerced and incentivized borrowers into homeownership-at-any-cost and lenders into destroyed lending standards, all amid inflationary monetary policies. The results were as basic economics has always taught. The 2008 financial crisis was a long time in the making—well over a decade. The truth, though pretty much ignored by the Washington Establishment, has been deeply documented in books by experts like Thomas Sowell, John A. Allison, and Peter J. Wallison. A good encapsulation of the government’s primary role in causing the economic catastrophe is presented by Don Watkins in his essay FREE MARKETS DIDN’T CREATE THE GREAT RECESSION.

Cohan believes that “The problem with Wall Street is its incentive and compensation system, which encourages bankers, traders and executives to take big risks with other people’s money. It rewards greed and recklessness without imposing accountability.”

What he doesn’t emphasize is that government regulation and interference is what skews the incentives (though, as noted earlier, he does name the “too-big-to-fail” policies, which he rightly argues should be thrown “into the dustbin of history, where it belongs.”) But he opposes proposals to “gut the financial regulations implemented after the financial crisis.” Instead, he proposes taking “a scalpel, not a sledgehammer,” to Dodd-Frank—and proposes a few significant changes.

Cohan is on the right track. But I think he misses the big picture.

We need a new incentive system on Wall Street, one that encourages risk-taking, innovation and creativity, while also holding the people who work there accountable where it hurts — in their wallets — when things go wrong, as they inevitably will again.

He’s right. And what he doesn’t acknowledge is that these are exactly the kinds of incentives that are seamlessly built into a free, unregulated financial market. (By “unregulated,” I do not mean government has no role. Laws against fraud, laws that protect the sanctity of contracts, and the like are proper government roles.) It was precisely the government’s regulatory interference that destroyed those natural free market incentives, rigging the system toward a “heads I profit, tails the taxpayer loses” mentality.

These caveats aside, I love that Cohan unabashedly defends the massively vital practical contributions made by profit seeking Wall Street to our well-being and standard of living. I would add that the work of Wall Street is extraordinarily humanitarian and richly moral—no pun intended. Isn’t making the world a better place for humans to flourish the essence of humanitarianism? Isn't that integral to the morality of self-interest that lies at the heart of free market capitalism? Yes and yes. Cohan’s is a good start in making the case for deregulation.

Related Reading:

Notes on the Sub-Prime Credit Crisis

The Nature and the Origin of the Subprime Mortgage Crisis—San José State University

Department of Economics

The subprime mortgage crisis had its origin in the program the directors of Fannie Mae initiated in the late 1990's to pursue social welfare goals rather than maintain financial viability.

Altruism: The Moral Root of the Financial Crisis—Richard M. Salsman for The Objective Standard, Vol. 4. No. 1.

The Morality of Moneylending: A Short History—Yaron Brook for The Objective Standard, Vol. 2, No. 3.

Obama’s ‘Best Investment’ Was Crony Socialism

The New Jersey Star-Ledger labeled the General Motors bailout “arguably Obama's best investment”:

[H]istory will show that the industry is thriving because it had a government that trusted it could redefine itself back in 2009 – the year President Obama refused to let General Motors and Chrysler die by completing a $79.7 billion bailout that saved the two companies and their parts suppliers – along with the one million jobs that depended on them.

I left these comments:

It doesn’t take an economist to see the fallacy in the alleged “success’ of the GM bailout. It just takes some knowledge of basic economics, a proper moral compass, and the willingness to think.

A thoughtful person knows there’s no free lunch. As [the great classical liberal economist Frederic] Bastiat taught, proper economic analysis must take into account not just what is seen, but what is not seen. What we see is what the Star-Ledger reports. What is not seen is the private investments not made. What is not seen is the more competently run auto company(s) that would have emerged or expanded (including a new GM and/or expanded Ford, which did not take a bailout). What is not seen are the jobs that would have been created. What is not seen is that investments, automaking, and jobs would not have disappeared: They would have taken on a different, market-oriented form. The GM and Chrysler assets, including much of the existing workforce, would have been re-deployed. Many of the existing employees would have been hired for the new auto jobs that would have opened up. What you don’t see are the new people who would have gotten jobs in the restructured auto companies but who today are still unemployed or underemployed because of the jobs “saved” for the beneficiaries of cronyism. No one can know precisely what is not seen. What we do know is the assets would have been put to work creating wealth and jobs.

What is ignored is the terrible moral hazard going forward. What reckless behavior will American auto companies engage in knowing that the politicians will be there to loot the taxpayers to bail them out? Why should the auto companies use flush times to prepare for the inevitable downturn? After all, the government will be there to break the taxpayers’ piggy bank on their behalf. The GM/Chrysler story is not over.

What is definitely seen is the immorality of the bailout. That bailout crushed the new opportunities that would have opened up for auto industry entrepreneurs and job-seekers to step in to fill the void left by a legitimate GM bankruptcy. What we see is the bailout money was forcibly seized from private citizens who did not volunteer to lend or invest the billions of dollars GM received. What right do politicians have to “invest” where private citizens won’t voluntarily do so?

Political hacks see GM as a government success story. Thoughtful people see that the bailout was, is, and never will be anything more than what it was—crony socialism. To call this an “investment” is an insult to real investors. To speak of “conscience” in the context of crony socialism for big business is a moral atrocity. The “clueless narrative” belongs to those who don’t consider what is not seen.

Related Reading:

The "Auto Bailout Success Story" Just a Corrupt Crony Handout

That Which is Seen, and That Which is Not Seen—Frederic Bastiat