Walter Hutchens’ Blog

Several critical, ongoing debates exist about the current global economic turmoil.

Last week the most prominent one was, “What should be done to make things better?” Spend a lot of money in a “stimulus” plan is the answer Congress gave. Thus three quarters of a trillion dollars will be spent in supplement to other measures already taken, including the Fed’s aggressive monetary policy, the TARP bailout money, and other actions the Fed, Treasury, FDIC and other incarnations of government have already taken.

In the months ahead we will be debating, “How should financial market regulation be changed given what happened?” Not since the 1930s has there been a riper moment for regulatory overhaul, whatever the contours of that overhaul that may turn out to be.

A third critical debate is, “What happened; who’s fault is all this?” This is an important discourse; we have to understand what went wrong to fix it. But in a season filled with irritants, one thing that’s been particularly galling to me is that some people engaged in this debate want to make this a simple story that reinforces their pre-existing, bumper sticker philosophies. They want to blame a handy, standard enemy: greedy bankers, corrupt politicians or inept big government. These perspectives are grossly uninformed or intellectually dishonest.

There’s plenty of blame to go around, both in the private and public sectors. Blame belongs to private consumers taking out liar loans, private loan originators making those loans, private secondary market participants, including financial institutions, which sold and bought toxic waste using 30x leverage, the private credit default swap “insurance” market, private credit rating agencies and private company shareholders and their boards that failed to structure incentives for executives in a way that created long term growth and stability. All these private actors have blood on their hands. To ignore all these culpable parties and blame everything on government is just a denial of reality, an outrageous ignoring of the capacity and responsibility of all these private actors to make sound independent judgments. It sickens me to see people argue that the whole crisis is the fault of the Community Reinvestment Act or some other singular act of government. What, the government made everybody act badly? Come on!

But saying we only have private parties to blame—like predatory lenders, greedy Wall Street bankers or even rapacious consumers—is also wrong. Culpability must also be assigned to the public sector. Lawmakers and the regulatory agencies they created helped get us here through both intervention and failures to intervene. Government fostered Fannie & Freddie, kept interest rates low for decades through Fed monetary policy and de-regulated some key aspects of the financial services industry. All that, it seems clear, contributed to the what has led to the current economic turmoil. But the government also failed to act to regulate mortgage backed securities and derivatives such as credit default swaps. (Alan Greenspan has testified that he was wrong on that. Yeah, you think?). Thus both government action and inaction enabled and amplified the systemic risk that now terrorizes us.

If you want to argue that “it’s the government’s fault,” it seems to me you must at least 1) not laughably blame the Community Reinvestment Act, a marginal piece of legislation at best, and 2) acknowledge, if you want to make the full bore case for government culpability, how different America would be without a secondary mortgage market for the last 70 years and how getting rid of central banking could have retarded the prosperity and relative stability we’ve had for decades. You also 3) have to account for all the private actors who made bad decisions, who acted in ways that brought their firms and now our national, if not the global, economy to its knees.