[Updated] Free Markets and the Credit Crisis Freefall

[Update: The WSJ reports that you’re now bailing out AIG.]

For years working in Washington, I listened to libertarian tripe about how privacy law would prevent free markets from operating, and how banks should be able to freely trade personal information to assign risk and create new credit products. The “Miracle of Instant Credit” was invoked as a positive force that would allow banks to move smartly into the subprime market and make more Americans homeowners. They won that battle with the 2003 passage of the Fair and Accurate Credit Transaction Act, which largely superseded state law attempts to rein in the trade of personal information in the financial context. Prior to this, banks also lobbied to remove barriers in place (but weakened) since the 1930s that limited joint ownership of banks, brokerage houses, and insurance companies. Allowing these mergers caused banks to become behemoths that could not be beaten because of their political power.

Frustration with the ideology of the free market radicals, and their blind faith in the market solving problems (if it didn’t solve a problem, the market wasn’t free enough, or the problem wasn’t actually a problem) motivated me to write the Denialist Deck of Cards. These same guys totally missed the housing blowup, or somehow thought they could manage the risk of it. Do you remember the news articles written about mortgages granted to people who didn’t even need to prove their income? Or the huge housing projects being built farther and farther into nowhere?

Well, it’s all coming down on us now. It’s not just the subprime area where the miracle of instant credit fueled the crisis. Prime mortgages, auto loans, and soon, credit card debt will all be in trouble. Meanwhile, the bankers made tons of money and many were just in denial about the crisis. As Credit Slips points out, Lehman Brothers paid out $5.7 BILLION in bonuses in December 2007, overall, compensation was up 9.5% for the year!

I’m happy that the feds taxpayers didn’t bail out Lehman. But other firms are going to fail, and you’re going to be left holding the bag for their denialism and their banal greed. Ultimately, the bailouts may be a good economic decision. But a few years from now when things have changed, let us remember how these people totally abandoned the rhetoric of personal responsibility, free markets, etc, when it was their interests on the line.