Financial crisis: Failure of markets or of government?

It seems as if everyone is heading to Washington, D.C. these days looking for a bailout – investment banks, mortgage banks, automakers and autoworkers, insurance companies, universities, and even the state of California.

Yet at least some people are questioning the wisdom of providing bailouts to every Tom, Dick, and corporate CEO that shows up. As Congressman Jeb Hensarling put it, "People believe we are now engaged in whack-a-mole at the bailout carnival."

People are looking to the wrong place for the solutions to this problem because they are looking at the wrong place as the source of this problem. Yes, there are a lot of companies out there that have caused their own problems, but this isn't a market failure. Instead, this is a failure built on the foundation of government monetary and regulatory policy.

Robert Murphy and Mark Thornton show that a large part of the problem today can be traced to easy money flowing from the Federal Reserve. Other reasons are the federal housing policies that pushed lenders to make these risky loans, labor policies that have the Big Three in trouble, and market regulations that have hamstrung the ability of the markets to handle this mess.

Today's financial situation is a failure of government, not markets. More on this tomorrow.

- Bill Peacock

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