Roots of the Financial Crisis

Here's a really interesting (and pretty good) take on the current financial state. It's entirely conservative and while I disagree with 1) the view that altruism in government is always a bad thing, 2) the view that the FDIC is totally worthless, and 3) the view that we can just return to the gold standard, the article does make some good points.

First, we have to be careful when government subsumes market principles to "doing good." I do think we as a nation gain a competitive advantage when we see that we are more stable as a nation, and protect those who cannot protect themselves, but the article points out ways in which our "doing good" has instead made us less stable.

Second, while it is good that the FDIC stands behind bank account deposits, it does allow those banks to adjust their risk models and issue credit that is riskier than they would issue if the federal government were not standing behind such guarantees. As an effect, it allows banks and other financial institutions to view the short term in higher regard than the long term. Bank account guarantees allow the self-interest motivator of the free market to turn into greed when liability is not allowed to attach to these institutions in full.

Finally, blurring the line between the public and private finance sectors is a bad thing, not a good thing. GSEs like Fannie and Freddie seemed like a great idea because it was a compromise: combine the stability of the federal government with the freedom of a private corporation. But what resulted was that we combined the worst elements of each and allowed a private corporation, which affected the markets as a whole in a way that a government entity could not have, to do the public policy bidding of Congress. I am not advocating the complete withdrawal from public control of private finance, but Congress and the Fed (through overly-aggressive inverted yield inflation controls) need to show some self-control and not masquerade their control of the private finance market. It all goes back to risk analysis: bank actuaries can do their job better if it's clearer how public control is intended to and will affect the market.