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Is free-market capitalism to blame for today’s economic crisis?

February 15, 2009

Despite well-documented empirical evidence of the relationship between economic freedom and growth, many believe unrestrained capitalism is the cause of recent turmoil in the global economy. A more accurate story, however, is that excessive government regulation, not free-market capitalism, is responsible for aggravating the current economic contraction.


Wirtschaftswoche  (Germany)

Publication Date: January 18, 2009


The  U.S. real estate market was the spark that ignited the recent economic meltdown. Fannie Mae and Freddie Mac brought about the wide-spread instability in the financial markets. In the 1990’s, these government-sponsored entities were told to expand “affordable housing. In order to fulfill strict regulations imposed by the Department of Housing and Urban Development (HUD), Fannie and Freddie purchased and guaranteed large numbers of subprime and other nontraditional loans and eventually became the primary customers of AAA-rated subprime-mortgage pools. 


In 2005, Alan Greenspan opined that if Fannie and Freddie “continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road.” Also, Greenspan said, “we are placing the total financial system of the future at a substantial risk.”


In 2005, legislation was proposed which would have reformed the entities and eliminated their investments in risky assets. The legislation failed as it was blocked by Democrats such as Christopher Dodd and Barney Frank, who received large political contributions from Fannie and Freddie.


Without the intervention in to the Free Market such disastrous loans would never had been made.


Yes, the free market must have oversight and regulation but not by people who are captives of the entities they must oversee and regulate.


Capitalism is not dead but it has been damaged and those who put their faith in government got hurt the worst.

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