That's a fair criticism of my reply. My initial statement almost had a flavor of "free markets are perfect", whereas what I really believe is that "free markets are the best system possible".
So, no true scotsman?
But I don't think that's a fair criticism. There is a clear, well-defined concept of "free market"; it's not like I keep backing off my statement every time someone scores a hit on my argument. If the theory can explain exactly why the various regulations on the market have the observed result -- that is, if it has scientific predictive value as opposed to an irrational belief system -- then I don't think I'm susceptible to this criticism.
In high school physics we did Newtonian mechanics assuming a frictionless surface, etc. It turns out that our experimental results didn't match up with what really happened, because we had friction and other factors. But we learned more physics, so even though we didn't have access to that frictionless surface, we could explain why the results differed, and predict just how those differences would appear (friction is proportional to downward force, etc.).
You're criticizing the market theory because the observed results have those "frictional" differences, even though we can tell you what is causing the friction, and predict (albeit to a limited degree at this point) what the future effects of proposed "friction" (i.e., regulation) would be.
The crash of 2008 was preceded by 20 years of deregulation. And the explanation? Too much regulation! A billion dollars in loans to minorities must explain the 2 trillion dollar problem!
There's nothing wrong with thinking a free market's the way to go for a given problem, provided you got there by engaging your brain rather than taking it on faith. Once you do that, you might find yourself thinking things like "Hm, maybe capital gains should be taxed as ordinary income", or "Hey, turns out it's mathematically impossible to balance the budget by cutting domestic discretionary spending".
The mother of all financial regulatory machinery, the central bank, is considered to be the primary cause of the crash by many. I find the argument reasonable. Correct or not is another story, but how can you dismiss the statement wholesale?
I don't want to be nitpicky here, but this is a conversation about not turning your brain off. Are you referring to the federal reserve? They don't regulate anything. The SEC? They're in no way similar to a central bank and have been regulating progressively less over the last 70 years. What changed in 2008 that made their regulation more burdensome?
If you're making a statement, it's on you to back it up. Shouting "regulation!" with no insight behind it might work in your social circle but in mine, it's turning your brain off.
The federal reserve manages the cash rate. The don't directly specify the risk premium spread associated with risky loans.
If someone offers a no-recourse billion dollar loan with no obligation for collateral, the rational financial decision is to take the loan, and invest the money. If the investment appreciates pocket the money. If it goes south return the investment and say "your problem" to the lender.
The federal reserve said they thought self interest would ensure the banks would not invest stupidly.
I don't see how this argument changes if overnight rate is 10% or 1%.
Again. This subthread is not about turning your brain off.
The fed changing interest rates is not regulation. It's not writing laws, it's not forcing anyone to do anything.
I'd appreciate it if you quieted your condescension. For someone who didn't even know that the United States had a central bank, you are extremely vocal about the topic of finance. We're all here to learn and exchange.
Even if actions of The Fed are not necessarily regulations themselves, the fact that The Fed exists at all and is able to exert influence is certainly the result of law. Understanding this, I don't have a problem with conflating the actions of The Fed and the regulation that enables The Fed-- "regulation".
There is healthy debate regarding the cause of the 2008 crash. Economics is not a science proper, and the data is noisy. You cannot simply write-off the argument wholesale by latching on to the debatable causal link between "de-regulation" and the crash. Unless, of course, you turn off your brain.
Thanks for the counter-condescension.
To the original point, they don't write regulation and it's hard to call a fixture of the last 80 years "regulation responsible for a recent incident", due to the fact that at some point there was a law.
"reg·u·la·tion [reg-yuh-ley-shuhn] noun 1. a law, rule, or other order prescribed by authority, especially to regulate conduct. ..."
http://dictionary.reference.com/browse/regulation
"The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) is the central banking system of the United States.
Its duties today, according to official Federal Reserve documentation, are to conduct the nation's monetary policy, supervise and regulate banking institutions, maintain the stability of the financial system and provide financial services to depository institutions, the U.S. government, and foreign official institutions."
http://en.wikipedia.org/wiki/Federal_Reserve_System
"Mission... supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers..."
http://www.federalreserve.gov/aboutthefed/mission.htm
(Emphases mine)
Care to share a reference that backs up that argument? I'm not doubting that there may be an argument, just interested to read that point of view.
If you're willing to generalize the comment to say that the crisis was primarily due to the heavy hand of the federal government, then I offer these two links. They're both op-ed pieces, so shouldn't be considered definitive research, but they're pretty solid evidence that some serious people do blame the government's regulation (as opposed to de-regulation).
1. A Government-Mandated Housing Bubble http://www.forbes.com/2009/02/13/housing-bubble-subprime-opi...
2. How Government Stoked the Mania http://online.wsj.com/article/SB122298982558700341.html
We're in the real world here. If the real world held up to a given person's theory, communism would've worked. You just have a different theory.
I'm not claiming markets are terrible, they're usually the best way to do things. But when you pigeonhole yourself into an absolutist position, you've guaranteed that you're going to be flagrantly wrong sometimes.