The Subprime Mortgage Crisis

A Thin Coat of Paint

This article appeared in the German newspaper Frankfurter Allgemeine Zeitung on 09-26-2008 written by Hans D. Barbier.

This is well-known from political debates. But it is always astounding to note just how many are skeptical of the market once one aspect or part of the free market economy acquires the suspicion of ineffectualness. The coat of paint is thin. The politics of the free market appear to be something like a good-weather discipline.

Now it hits the capital markets. Alledgedly, this is the mechanism that pushes the world into chaos and suffering because of the selfishness of their primary movers and the exorbitance of their claims. No doubt, the turbulences on the capital markets are worrisome. But does the background that led to these new developments (which in fact appear unhealthy) support the assumption that the freedom of the capital markets is too big, that the government must have more regulatory power? Wouldn't just the opposite be true, that the background that led to these frightening developments points prominently at a failure of the government?

One is encouraged to remember that the beginning of the capital market crisis was marked by the subprime crisis in the US. In fact, the government was the primary cause of the subprime crisis, in its trinity of President, Treasury, and the FED. Good deeds were to be done for the people, that is, housing construction was to be supported by socially attractive conditions. And low-interest loans were to be kept on the market so that the wave of new constuction wouldn't be too small. For this purpose, the FED was asked to release more funds. Banks were emphatically asked to consider the social aspects of loan terms. And the "market" pair Freddie and Fannie was instructed to buy home-building loans and charter them into their assets with the purpose to hide the market distortion that was politically desired. Without this political influence on the market, this process would have been impossible. Arguably, the initial political manipulation was the seed of the captial market crisis, which could not have been predicted by any expert before its manifestation.

The market may allow some slyness, some accounting failure. But what the subprime crisis did to the world markets was beyond any occasional market failure. And in view of the background of this experience it is seriously suggested to sacrifice the freedom of the capital markets to the dilettante and partially unscrupulous bustling around of the politicians?

No: The claim that the freedom of the capital markets endangers the world economy is pure nonsense. Like no other market, the capital markets ensure the agility of the economy in time and space. However, they have to be left alone to do their work. Politically dictated interest rates and privileged (mafia-style) Fannies and Freddies are not only monkey wernches in the cog wheels of the capital markets. They actally disable any uncorruptible accountability, as it is arguably but silently desired by the politicians. The citizens of the free economies of the world would be crazy if they allowed the politization of their capital markets.

Politicians who cannot assess the consequences of the simplest tax should not be allowed to tell economists and fincance experts how to link freedom of capital transfers with reliable calculation. The answer is, by the way, simple: statistically, accountability is a consequence of the freedom of the individual cases.

This is the core of a search process that characterizes the free market economy. This process requires a non-political capital market, and such a free capital market must be part of a good economy.

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