There’s no question that the financial crisis has been horrible for folks of the free-market, libertarian mindset.
The conventional view is that the whole thing was the result of “bankers running amok”, leveraging to the hilt for their own gain, and ultimately blowing up the whole financial system.
It certainly doesn’t help libertarians that the one man identified as the bubble blower in chief, Alan Greenspan, was an Ayn Rand-nik back in his day.
It’s not like libertarians don’t have some great counter-arguments. There have been all kinds of horrible financial regulations with unintended consequences. And government regulators/watchdogs did a horrible job at the tasks which they were specifically tasked with. The cheap money was not as the result of any market forces, but rather Fed policy, and the government practically made it its mission to inflate the housing bubble.
Still, forgetting the US for a second, you have CATO-type libertarians on record praising the genius deregulation in places like London and Iceland, which have imploded horrendously. At a minimum, they must acknowledge that the free market systems they had been praising weren’t what they seemed to be.
But a belief that some financial regulation is a good idea doesn’t have to be inconsistent with the libertarian-light ideology as favoured in the US.
Every libertarian loves to cite the old parable about the tragedy of the commons. You know: A town has its common land, and in a spirit of community it says all the herders can let their animals graze there for free. But, whoops! Without private property, nobody has an incentive to economize and everyone over-grazes, destroying the commons.
Well, to some extent, we have a financial commons. We’re all forced to use the same legal tender. If Citigroup (C) goes out and creates credit beyond all proportion, and then needs a bailout, there’s a good chance it can damage the value of my dollars when the Fed has to print. You saw this in the extreme in Iceland, where the value of the currency totally collapsed. You see it in the UK already, and it could get much worse if a Barclays-size bank ever collapses. It has a balance sheet bigger than the nation’s GDP, and the value of the pound could go to toilet paper if the government has to print up a bailout for it.
Now the true, radical libertarian solution would be to get rid of a single legal tender and adopt some type of private currency, free-banking system. But competitive, private currency will never happen here. We’ll always have a currency commons. The next best solution is to limit how aggressively anyone can graze.