A Convenient Financial Crisis
In the doom and gloom of the financial crisis, the banks have been cast as irresponsible and reckless, while governments have been cast as merciful rescuers. This accolade, however, seems to be largely accidental—and highly convenient. Yes, the banks must take some blame. But if the government now believes it must interfere with free market principles to save the banks, then the government is also implicitly admitting that it failed to act back when it mattered most.
If government regulation was needed, it was needed months ago in order to avoid the financial crisis in the first place. Regulation after the financial crisis is too little too late. The oh-so-obvious lessons have been burned into any banks left standing. They hardly need the government to tell them what went wrong and they are not—for their own sakes—planning to make the same mistakes again. The market will ensure that banks will discipline themselves after a disaster such as this. Government legislation’s main effect is just to be seen to be doing something.
Government has also benefitted from events that diverted blame. For example, the sudden ban on short-selling made it look like evil financial opportunists were causing the string of bank failures in the week of crisis. However, note that the short-selling ban was announced the same night as the $700 billion US bailout plan. The bailout plan itself made the short-selling problem pale in comparison, so it’s primary effect was cover from the government’s own failure to have averted the impending crisis in the first place.
As for the bailout itself, government intervention may be necessary if we are to avert a greater depression. But the larger picture is that the major damage is already done. Governments failed to enact the policies—the very ones that they now say are essential—back when they were needed most. Amid the carnage, governments are winning the war of perception and are seen to be “solving” the problem. In many ways, government failure caused it.