Amazon Exclusive: Post-Election Commentary from Author John A. Allison
The 2012 election has reinforced for me that the U.S. has a simple choice – return to the principles that made us great or face economic decay and social unrest. One of the reasons I wrote my book is because it seemed to make sense to have someone who had an inside and comprehensive understanding of the causes of our financial problems to comment on the issue. In the aftermath of the recent election, it’s even more important for the public and policy makers to understand what drove the financial crisis and what choices we must make to revitalize our economy.
The media and other statists have created a myth that the financial crisis was caused by banking deregulation and greed on Wall Street. However, banks were not deregulated. In fact, three major new regulations were passes during the Bush Administration: The Privacy Act, The Patriot Act, and Sarbanes-Oxley. Banks were misregulated, not deregulated. Also, there has always been plenty of greed (and fear) on Wall Street. However, there is not one shred of evidence there was a greed plague that swept the Street.
The financial crisis and failed recovery were primarily caused by government policy. The two main culprits were errors made by the Federal Reserve and government housing policy, specifically as executed by Freddie Mac and Fannie Mae, the giant government-sponsored enterprises that would never have existed in a free market.
My book, The Financial Crisis and The Free Market Cure covers this and other economic myths and misunderstanding such as the “shadow” banking system, fair value accounting, Pick-a-Payment mortgages and the like. However, as interesting as the economic discussion is, the real solution for our financial problems is philosophical and the cure was espoused by Thomas Jefferson in the Declaration of Independence: “Life, Liberty, and the Pursuit of Happiness.”
People on all sides of the political spectrum defend liberty, but few people understand why liberty is essential to human well-being. Government regulations put “balls and chains” on innovators and entrepreneurs and thereby, slow and eventually stop progress. Given man’s nature, socialism and communism are doomed to failure.
So, again, I say, the US has a simple choice: The laws of mother nature and human nature are not subject to popularity or political whim. Capitalism or decline. You choose.
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Many observers have blamed the financial crisis (and ensuing recession) on reckless speculation by executives at banks that were “too big to fail” and knew it. As the story goes, they took excessive risks that would boost their compensation as long as the good times lasted, secure in the knowledge that when the bubble burst the government would have to bail their banks out. “Wall Street greed” was the shorthand reference by Senator John McCain (during his 2008 presidential bid) and the Occupy Wall Street protestors alike.
Allison paints a very different picture. While readily conceding the existence of Wall Street greed, which in his view was not an entirely new phenomenon, he suggests that private sector mistakes varied from one bank to another and could hardly have caused a $3 trillion housing bubble (overvaluation that would inevitably have to be reversed because prices only clear when supply equals demand). The real problem, he asserts, is major flaws in government policies and actions as the housing bubble developed compounded by panicky blunders during the crisis.
For example, the Federal Reserve provided too much credit for too long under Chairman Alan Greenspan, contributing to the common delusion that the situation was sustainable because the Fed would never allow a financial crisis to happen. Then incoming Chairman Ben Bernanke jammed on the monetary brakes, bringing about an inverted yield curve that forced banks to search for higher yield (and risk) investments – only to revert to radical rescue efforts as one major institution after another got into trouble. While the Fed’s moves might have been appropriate for a liquidity crisis, the true issue was solvency in most cases as the result of excessive leverage and under-performing assets.
The FDIC, Fannie Mae & Freddie Mac, the FHA, the SEC, and a bipartisan assortment of political leaders are also criticized. Allison’s points are clear, stated with authority, and ring true. Even if you aren’t convinced by his version of the story, it is well worth reading to see what other observers and the media may have missed.
As for suggested solutions, Allison’s free market ideas may seem a bit extreme. The country is not going to eliminate the Federal Reserve and revert to a gold standard, for example, so it might be more to the point to focus on reining in the Fed’s penchant for focusing on the full employment part of its dual mandate while taking a very relaxed attitude towards inflation.
And while the concluding chapters about the philosophical differences between liberals and conservatives, etc. are interesting, hoping for a return to following the Constitution as it was originally intended seems rather futile. It might be more to the point to focus on finding a more constructive path forward than the country has been on in recent years.
Other reviews criticize his writing style and in the last chapters his partiality to Ayn Rand’s philosophy (I agree that did not advance the subject matter). His writing could have been more polished but I found it down-to-earth and an easy read—as contrasted with other arcane, erudite, and pedantic writings about the crisis. Those who favor big government as master over and regulator of markets obviously disagree with his conclusion. However, to those folks I have asked the following: “Why did community banks in the late 70s depart from prudent lending standards/guidelines and subsequently lend to anyone?”
I think Allison answers that convincingly in an easy-to-understand manner that a layman can understand. His analyses/explanations also confirmed my findings in 2007 of the cause of the meltdown.
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