The Financial Crisis Inquiry Commission Report

"It’s mostly the dissent, which basically shows this amazing phenomenon, that the Republicans have not been able to learn from the past 30 years. Especially the Wallison dissent , which takes what is a very complex crisis that has multiple roots and lays it all at the door of Fannie and Freddie and government intervention. It seems to me transparently designed to exonerate free markets. I like free markets – I think we benefit from having market competition and the market setting prices and so forth – but this crisis has proved that financial markets are not self-regulating. To draw from this complex analysis that particular conclusion I just find astonishing. That’s where reality, every now and then, intrudes. That’s why, as I said before, in a way the crisis wasn’t severe enough. Because a floor was put under the problem at the right moment, it was possible for people to move on. The other thing is just purely political. As long as the Republicans can get people to vote for these same deregulatory policies, they’re not forced to face the music. I think the election this year is going to be very crucial in either affirming or denying that. If you continue to deny reality for long enough, at a certain point you’re going to have to pay a political price. We can’t know how that kind of counterfactual would have worked. You’re right that there’s a massive inconsistency in the libertarian position. The fact is that it was only very strong action by the Fed, through Congress and the TARP [Troubled Asset Relief Program], that put the floor under the crisis. And yet, there’s still a belief that the government caused this. There is a great deal of anger against the TARP, despite the fact that most informed observers agrees it was a necessary thing to do in order to correct a mistake that was created by private markets. You may be right, I suppose, that even in a more severe crisis, people could still maintain that belief, but it does seem to me that when suffering reaches a certain level, that argument is going to be harder to sustain. It is true that it is a part of the American political culture, but that culture has changed over time. People believed that very strongly in the late 19th century. Then you had the rise of the Progressive movement, which shifted views towards the need for a stronger centralised state. Then it made a big comeback in the 1920s and then the Great Depression again shifted views. It may be a religion, but it’s not a religion that members believe in at all points. It’s what’s an economist would call a low-level equilibrium trap. You don’t want to pay taxes to get better government services because you’re convinced the government will waste any money that you give them. So you’re never in a position to get out of that. A lot of Latin America is basically in that situation, and I’m afraid that the US has now been in this situation for some time."