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The Financial Crisis, Free Markets, and the Nirvana Fallacy:

I'm sure everyone has seen various op-eds, blog posts, and so forth proclaiming that the financial crisis shows that capitalism can't be left "unregulated", and that the end of "free market ideology" is nigh.

It seems obvious to me, though, that critics are comparing markets (which were far from unregulated) to a hypothetical, rational, efficient, regulatory system, which is a classic nirvana fallacy.

I won't dispute that many market actors--banks, bond rating agencies, mortgage companies, etc.--hardly acquitted themselves well during the housing bubble and resulting financial crash. But exactly which government actors acquitted themselves well? The public-private Fannie and Freddie Frankensteins, which helped inflate the bubble and whose bailouts will cost taxpayers tens of billions of dollars? The Treasury Department, which failed to do anything proactive to prevent the crisis, and ultimate whose reaction to it under Paulsen ranged from subdued panic to hyperactive panic? The Federal Reserve, whose monetary policies were probably the biggest villain in the whole fiasco, and whose chairman famously argued, absurdly, that housing prices nationwide could not go down because they never had before (and even more absurdly based his policies on such nonsense)? Congress, which pushed Fannie and Freddie to make ever more risky loans, berated (and regulated) financial companies for not generously lending to subprime borrowers, and not only prevented the Bush Administration from reforming Fannie and Freddie but gave them even more lending authority just as the crisis was emerging? And which then passed a "stimulus" bill full of longstanding Democratic priorities but rather short on actual stimulus? State and local governments, which spent lavishly when bubble-related tax revenues were way up, and almost none of which prudently planned for the bubble's bursting? And which bought into the "everyone should own a house mentality" to the extent that they were disinclined to use their existing regulatory powers to rein in crazy mortgage practices (like 0 down, option arms to insolvent borrowers) and indeed barely prosecuted rampant bubble-time mortgage fraud?

Sure, if you compare actual market actors to imaginary perfect government officials, government is going to come out looking like a mighty good alternative. But if you compare actual market actors to actual government actors, it hardly seems that the financial crisis shows the latter's superiority to the former, nor does it support the idea that turning over more and more of the economy to the tender mercies of government regulation is likely to benefit the public.

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