Intervention and Economic Crisis

by: Thomas E. Woods, Jr.

No supporter of the market economy could have been surprised when the recent financial crisis was inevitably blamed on “capitalism” and “deregulation.” The free market, we were told, was a recipe for financial instability. “Advocates of the free market must confront the fact that both the Great Depression and the current financial chaos were preceded by years of laissez-faire economic policies,” wrote Katrina van den Heuvel, editor of The Nation, and author Eric Schlossel, in September 2008.

It is not enough to call this a distortion of the truth. It is a grotesque distortion, worthy of the Soviet politburo. The crisis is in fact the altogether predictable fruit of massive government and central-bank distortions of the economy. That may be why the free-market economists of the Austrian School were practically the only ones to have seen it coming.

There has been much discussion on right-wing radio and in the conservative press about Fannie Mae, Freddie Mac, and the Community Reinvestment Act (CRA), which have been described as forms of government intervention that contributed to the financial crisis. To a certain extent that is all well and good: Fannie and Freddie enjoyed special government-granted privileges, along with an implicit bailout guarantee, that allowed them to become much more substantial actors in the secondary mortgage market than would have been possible in a free market. Furthermore, politicizing the lending process and cajoling banks into abandoning traditional standards of creditworthiness cannot make a positive contribution to the health of the banking industry.

But although there is no question that those factors exacerbated the problems that led to the crisis, they are not the primary culprits.

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