Many people say the financial crisis was caused by inadequate regulation: they're right. In a free market, business behavior is severely regulated by the potential to lose money when bad decisions are made. What the government did was eliminate that regulation by guaranteeing people against losses, thereby encouraging outrageously risky behavior:
- Two government-sponsored enterprises, Fannie Mae & Freddie Mac, bought mortgages from banks, eliminating the risk to banks of lending to people with poor credit and an inadequate down payment.
- An implicit guarantee by the government that it would bail out the FMs allowed them to borrow at extremely low rates and profit from accumulating trillions of dollars of debt to acquire mortgages: they were able to borrow amounts equal to forty times their net worth.
- FDIC insurance has caused depositors to pay no attention to the soundness of the banks where they keep their money. Thus, prudent behavior by banks not only isn't rewarded, but is actively discouraged, as they make more money by taking on risk and don't need to fear a loss of confidence when they engage in irresponsible behavior.
- Having a central bank (the Fed) with the power to create money in unlimited quantities creates a false sense of security throughout the banking industry, one which will last until a hyperinflation that destroys the buying power of those dollars makes it clear that the government can't create wealth just by printing it.
- The bottom line is that past government interventions have destroyed the regulatory nature of markets, and the current proposed ones only make it work. I am running as the only candidate proposing to regulate bankers and punish bad behavior by ending government intervention.
By the way, there is no credit crisis among borrowers with good credit. High grade commercial paper rates are at 4%, below the level of inflation. People with 20% down and relatively good credit (the old standard before the Community Reinvestment Act was strengthened in 1994 to compel more loans to high risk borrowers) are having no trouble financing home purchases. Credit card offers to individuals are at least as common as ever. The investment bankers having trouble borrowing are the ones who shouldn't be trusted to borrow, and the bailout was for them.