Friday, January 8, 2010

Krugman (Of Course) Ignores Moral Hazard

In his continuous war against anything free market, Paul Krugman thinks he is attacking Wall Street and their behavior because they were "free market." In Krugman's view, financial bubbles are a natural consequence of markets that are not absolutely overseen by government regulators.

In his latest missive, Krugman claims that financial regulation will be "helped" by the formation of a new government "consumer protection agency." He writes:

A lot of the public debate has been about protecting borrowers. Indeed, a new Consumer Financial Protection Agency to help stop deceptive lending practices is a very good idea. And better consumer protection might have limited the overall size of the housing bubble.

Well, there is a problem here. Why were the subprime loans being made in the first place? It was government policy to "encourage" banks to make these loans. Yes, Krugman might deny that the Community Reinvestment Act of 1977 had anything to do with the subprime disaster, but history tells us something different.

The government was demanding that banks loosen their underwriting standards in order to promote the "Ownership Society" nonsense that came from the Heritage and Cato institutes. While some of the ideas were good, the idea that the government push home ownership no matter what was a disaster.

Furthermore, I never have read anything from Krugman that deals with the institutional moral hazard that has existed with the banks and financial insitutions in general. No Greenspan Put, not bailouts of politically-favored firms, no nothing.

So, Krugman gets it wrong once again. Not that he or anyone else in the economics profession cares. Krugman has spoken and since he is a Voice of a God, that is all that is needed. Standards of truth don't matter.

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