> Shockingly a WSJ editorial board member believes the crisis was caused
> by government and not private institutions:
>
> http://www.hoover.org/publications/policyreview/46386702.html
>
> Can anyone respond to this? Is there anything to it?
It's not really worth doing a point-by-point rebuttal, since his argument is so marginal. Also, I didn't read diligently to the end. And the thing is just stupid. But here goes.
His argument:
(1) We shouldn't blame "Wall Street people" for the crisis, we should blame "the government." (2) The Wall Street people weren't packaging lousy securities and fobbing them off onto unwitting investors. The proof is that the Wall Street people themselves kept a lot of those securities on their own books and many lost a lot of money. (3) Nor is it true that the Wall Street people's risk models were foolish to assume that national housing prices can never go down; that's because there's no such thing as a national housing market. (4) What happened is that there was a panic; that's normal, because "risk is risk" - markets are efficient but no one ever said they're clairvoyant. (5) What turned the panic into a serious crisis was the government's incoherent response which alarmed the markets and convinced them that maybe there's something to the idea that we're headed into another Great Depression.
Okay. (2) is basically true. He's correct about that. Both buyers and sellers were at fault.
(3) is completely wrong and makes no sense. The Wall Street risk models really did assume housing prices would never go down. They refused to acknowledge that there was a giant housing bubble going on. (Saying there's no such thing as a national housing market is meaningless nonsense.) This paper by Fed economists - http://tinyurl.com/5vgksd - concludes: "Analyst reports and other contemporary discussions reveal that analysts generally understood that falling prices would have disastrous consequences but assigned that outcome a low probability." Meanwhile, there were a number of well-known economists pointing to simple, irrefutable evidence of a giant housing bubble. The Wall Street people ignored the evidence (1) because of bubble psychology and (2 because they were making lots of money at the time. As long as they got out in time, they'd be fine. If they stopped playing the game then they wouldn't make any money. It is in that sense that (1) is wrong.
(4) "Risk is risk." This is ridiculous. Risk is normal if it's individual risk. If I buy a stock, I'm risking losing all my money. But if there is a panic due to *systemic* risk - the risk that the whole economy will fall apart - then that is a failure of the private market system. Therefore, (4) invalidates (1).
(5) Even if it were true that the government's incoherent response worsened the crash, you're still left with the conclusion that the market system is vulnerable to catastrophic crashes unless the government intervenes in just the right way. He doesn't make that point explicitly, though, of course. Had the government done nothing at all then we really would be in a 30's style Great Depression. I actually don't think he even tries to dispute that.
SA