Since 2008, nearly every person has been blamed at one point or another for the worst financial crisis since the Great Depression. Bankers; Credit Rating Agencies; Stockbrokers; your Great Aunt’s speculative spending habits – wherever you may find an observable demographic – there is a degree of blame that they have been saddled with. However, an entity that has failed to receive such criticism for their immense role is one many still fail to believe today – the role of the government.
Following the collapse of the world financial institutions, there has been a significant shift towards consolidating the economy under the control of the state. With large populist movements such as ‘Occupy’ influencing policy over the past decade, the current economy is a wasteland of red tape and exceedingly high barriers to entry – the consequence of which simply stifles innovation through potential new market entrants being squeezed out through failing to induce such high costs, subsequently entrenching the oligopoly of big business. No other sector has seen this more pronounced than in banking – with the current climate of regulation post 2008 causing a ‘self-defeating stringency that just entrenched the incumbents and significantly reduced both innovation and customer benefits’.[1]
Perhaps the most unusual aspect of this has been the public’s embrace of such supressing effects. A recent study places bankers as one of the least trusted professions following the financial collapse – thus legitimising the shift towards ever greater levels of regulation.[2][3] However, the question worth probing is whether such a shift is within logical reason – or whether the narrative surrounding the financial crisis has been misconstrued.
The impact of government initiatives is one that many fail to consider. Conceived within the resurgence of the ‘American Dream’ during FDR’s New Deal, Fannie Mae was intended so that no individual misses out the opportunity of owning their own property. The role of Fannie Mae is to underwrite mortgages so that, under more prudent rules of borrowing, those at a greater risk of default can still qualify.
This entity, and it’s later brother firm Freddie Mac, came to dominate the US mortgage market – ranking 21st and 41st in terms of largest American corporations respectively. Despite intending to have a specific role within the economy – the Government Sponsored Enterprises (GSEs) were quickly hijacked by politicans wishing to score a few easy points with the electorate. This came to notoriety in 1999 following the Clinton administration pressurising these entities to expand mortgage loans to low and moderate income earners, as part of their branding as a compassionate government.
The problem is shown with this exact point. Through Fannie Mae and Freddie Mac artificially extending home ownership to riskier households by effectively underwriting mortgages – they are creating a speculative housing bubble through the ‘moral hazard problem’ – as the banks who are making the loans wouldn’t face the consequence if their debtor was to default. This therefore resulted in a highly insecure financial system – as the gains appeared near infinite, while the losses were protected by the government – leading to a ballooning in the subprime market.
For a market to work efficiently, an agent must face the extent of both gains and losses. Government initiatives led to a complete distortion of this principle, and holds a significant level of responsibility for the financial insecure market that culminated with the 2008 crisis. While those with a vested interest to overturn the current order often point to this period as the failing of capitalism and the apotheosis of years of deregulation – they fail to consider that the nature of the market they’re criticising was diametrically opposite to one that resembled laissez-faire.
For further information on this topic, read the Mises Institute’s ‘The Crisis in 10 Points’, which can be found at: https://mises.org/library/crisis-10-points
Bibliography
[1] Hewson, Victoria (2021): Removing the barriers to enterprise; pg. 17 (can be found here: https://iea.org.uk/publications/removing-the-barriers-to-enterprise/) [2] This study can be found here: https://www.cv-library.co.uk/recruitment-insight/10-least-trusted-professions-uk/ [3] A further study can be found here: https://voxeu.org/article/experience-banking-crises-reduces-trust-banks