Caveat Archos

Should the repeal of Glass-Steagall be faulted for the sub-prime crisis? According to the Consumerist: probably yes.

I say, definitely no. The blame for subprime should be firmly placed in Bernanke’s, Greenspan’s, and Congress’ collective laps. The poor policy decisions prompting the creation of pseudo-capital, created an incentive system that heavily rewarded short-term thinking over long-term evaluation. I don’t fault the banks one bit for the subprime crisis; this whole exercise has just reconfirmed my faith in (what I think is) the Keynes quip that inflation is the most insidious of all forms of policy because it enlists all the benevolent forces of the market on the side of destruction. Here, the inflationary policy (high liquidity, Congressional duress through the Community Reinvestment Act, etc.) forced banks to lower their standards to make loans in order to stay competitive in the short-term marketplace, thus “enlisting the benevolent market force” of competition on the “insidious side” of wealth destruction in the long-term. With respect to Lord Keynes, we should be worried about the long-term because we never know when it will decide to activate itself.

It seems to be the sentiment de jure that more governmental interference/regulation is required; I think this faith is misplaced. The State is given the monopoly over coercion; its proper role is the insurance of property and autonomy rights from outside encroachment. The proper role of the State is to fight fraud and strive to increase transparency so as to limit the potential for future fraud; the State’s responsibility is not to try and “fine-tune” the economy, or the environment, or any of the other projects which the State has been charged to “fix”. Moreover, when the State does try to stray from its sole mandate, it actually acts completely contrary to that mandate; in other words, by attempting to meddle, the State has thereby harmed property rights and autonomy. What one must realize when he advocates increased regulation is that he is choosing the Hitman over the Repairman to fix the leak in the pipes or the crack in the foundation. The market will, when left alone and not meddled with by the State, diagnose and remedy any short-comings with a keen eye toward the foreseeable viability of such a structure. When the State meddles, it creates entirely new, unforeseen incentive-structures which significantly change the human behavior inherent in the market. Blaming the banks, the credit-agencies and even the people who bought the homes in such a liquid market, without first taking the Creators of the environment (Congress, the regulatory agencies) to task (i.e. voting every single one of the scoundrels out and also returning/shrinking Leviathan to its proper role) is like blaming a man who had never learned how to swim for drowning when he was forced to dive into the deep end of a pool at gun-point.

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