The Underlying Government Causes of the Financial Crisis

Kevin Glass | February 10, 2010 11:08 AM

Scholar Jeffrey Friedman has adapted a journal article of his into a piece published by the Cato Institute's Policy Report. He deals with the unintended consequences of regulation piled on top of regulation, and describes the financial crisis as a "perfect storm." Friedman also addresses the wider issue of whether or not our approach to regulation as a whole is working.

The piece (combined with the already-exhaustive literature on the subject) should put to rest the canard that the financial crisis was caused independent of government bungling. An excerpt, but you are strongly recommended to read the whole piece:

You are familiar by now with the role of the Federal Reserve in stimulating the housing boom; the role of Fannie Mae and Freddie Mac in encouraging low-equity mortgages; and the role of the Community Reinvestment Act in mandating loans to "subprime" borrowers, meaning those who were poor credit risks. So you may think that the government caused the financial crisis. But you don't know the half of it. And neither does the government.
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Omniscience cannot be expected of human beings. One really would have had to be a god to master the millions of pages in the Federal Register — not to mention the pages of the Register's state, local, and now international counterparts — so one could pick out the specific group of regulations, issued in different fields over the course of decades, that would end up conspiring to create the greatest banking crisis since the Great Depression. This storm may have been perfect, therefore, but it may not prove to be rare. New regulations are bound to interact unexpectedly with old ones if the regulators, being human, are ignorant of the old ones and of their effects.