Dartblog

“That we are in the midst of one of the most serious financial crises in history is clear,” Henry Manne, dean emeritus of the George Mason University School of Law, writes in Forbes, a little glumly (for he has all but conceded this election).

The general causes of this economic maelstrom are now pretty well known: expansion of credit via low-interest rates by the Fed; subsidization and grotesque encouragement of inappropriate housing loans (courtesy primarily of Messrs. Dodd, Frank and Schumer and the FMs); a bad accounting call on mark-to-market by the SEC; and finally exacerbation and opaqueness engendered by financial instruments too complex to evaluate, decipher or untangle.”

Ah, but these opaque instruments which were the stylos of disaster? They came into being in order to make those “grotesque” loans tradeable—the natural impulse, one might say, of the market being injected (and injected forcibly, by its own regulators) with fresh debt. Debt called into being by the government does not by tradition invite special suspicion. And so derivative securities might, in the quarters of devout housing bears, have raised red flags; but to ordinary bankers they did not.

What Mr. Manne explains is that of each wind involved in this “perfect storm” not one could, pace Barack Obama, reasonably be called deregulation.

Leftist attitudes were reaching a crescendo among the ideological classes, spurred on by such disparate and often logically irrelevant notions as racism, feminism, environmentalism, global warming, a health care crisis, an unpopular war and high energy costs. The political part of the mix included a bizarre set of primary elections and unlikely final candidates, one of whom is perhaps the most liberal figure in American politics. Globalization and increasing international trade stirred up the nativists and protectionists more than usual. The inevitable market-distorting results of interest rates kept too low showed up alongside a poor man’s affirmative action lending program, all of which created a bubble that had to burst eventually. And new and not well-understood financial devices and organizations were creating public confusion and mistrust.

It was unlikely that all these influences would come to fruition at the same time, but they did. That is the nature of random events. The unlikely happens, and, almost by definition, no one is prepared for it when it does.

He continues:

The political direction of the country is now determined for a long time to come, and it is inevitably leftward.

There is a lot of hawing in conservative quarters about the complexion of the situation. Is it so difficult to explain? It is in the nature of banks that they will structure their businesses such that they obtain the lowest possible likelihood of imploding in a fiery, horrible bankruptcy, losing money for everyone fool enough to touch them. They are impelled to establish, therefore, a harmonious balance of debt and assets. When a galumphing authority comes about—say, Congressional Democrats and allies like Mr. Obama—and stamps its leaden hoof of social justice upon the balance—well, the banks obey as best they can. And certainly some implode. Would Mr. Obama care to explain that all this economic pain must be endured in quest of his perfect society? Probably not. Yet Barack Obama and his left-liberal cohort want to do for the entire economy what they did for housing. Henry Manne suggests taking shelter.

Says Mr. Manne: “Like it or not, these few intellectual bastions of freedom philosophy [George Mason and similar institutions] will be about the only thing that keeps these ideals alive in the coming years. But we should never underestimate the power of good ideas. Like the bad ones we are about to witness in large numbers, they may just have to bide their time until a new crisis causes the fickle and uninformed public to demand a new direction.”