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It wasn’t Milton Friedman’s fault
Posted By Russ Roberts On June 21, 2012 @ 10:24 pm In Crony Capitalism,The Crisis,Uncategorized | Comments Disabled
Krugman’s story of the crisis is that it was just one of those things, as Cole Porter would put it — just one of those crazy flings. One of those episodes of exuberance that markets are prone to when things are too quiet for too long. He also blames free market dogma — an ideology “that was not just pro-market but religiously pro-market that markets are never wrong, that all government regulation is bad, that government is never the solution it’s always the problem, so that we had a kind of reckless removal of the safeguards on the system all on top of what would probably have been a gradual march to crisis anyway.”
I point out that government didn’t act as if markets are never wrong. Regulation isn’t the only form of government intervention. There was plenty of government intervention–the bailing out of creditors that lowered the price of recklessness. Here’s my conclusion:
So the calm of the last three decades was unnatural. There should have been more defaults and bankruptcies that would have reminded investors of the real risks they were taking. And by refusing to let creditors pay a price for bad bets, the government encouraged more reckless risk-taking. How much of the mess we’re in is due to the creation of moral hazard by government is an open question. Monetary policy played a role in creating the bubble. There was destructive housing policy. And surely human fallibility is part of the story. Just don’t tell me that what happened was the result of a hands-off government. When it comes to coddling banks and destroying the natural feedback loops of profit and loss, government’s fingerprints are everywhere.
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 In this PBS interview: http://www.pbs.org/newshour/rundown/2012/06/paul-krugman-on-the-cartoon-physics-of-the-2008-crash.html
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