I really like the way Michale Hirsh, author of Capital Offense: How Washington’s Wise Men Turned America’s Future Over to Wall Street, describes the causes of the crisis:

A now infamous 1999 Time magazine cover featured Alan Greenspan (then chairman of the Federal Reserve), Robert E. Rubin (then Treasury Secretary) and Lawrence H. Summers (then deputy Treasury secretary) as “The Committee to Save the World.” The three men, the magazine declared, had steered America through the perilous shoals of highly volatile world markets. The United States economy remained “astonishingly robust” and, by protecting American growth, the three had made “investors deliriously, perhaps delusionally, happy in the process.”

A decade later, in the wake of America’s 2008 fiscal meltdown, the thinking of Time’s “Three Marketeers” and their colleagues in Washington and on Wall Street would be cited as a major cause of that crisis. Mr. Greenspan has been chastised for keeping interest rates too low for too long, for failing to see the danger of subprime mortgages and falling house prices, and for neglecting to use the Fed’s regulatory clout to restrain the excesses in the market. Mr. Rubin has been taken to task for promoting the repeal of the Glass-Steagall Act, which was passed during the Great Depression and prohibited commercial banks from engaging in the investment business. And Mr. Summers has been criticized for failing to foresee the risks derivatives posed and for his reluctance to regulate these exotic financial instruments.

In fact, the main reason the financial crisis of 2008 occurred, the journalist Michael Hirsh argues in his provocative new book, “Capital Offense,” is that “the people in charge of our economy, otherwise intelligent and capable men like Greenspan, Rubin and Summers — and later Hank Paulson and Tim Geithner — permitted themselves to believe, in the face of a rising tide of contrary evidence, that markets are for the most part efficient and work well on their own.”

-Michiko Kakutani, NYT

I came to the same conclusion when tracing the origins of this crisis to the men who radically deregulated the markets in Bailout Nation.

Hirsh puts the prior history of regualtion and deregulation into broader context. Its really about whtehr you believe Human Beings are rational or irrational:

“In these pages Mr. Hirsh looks at how the ideas of John Maynard Keynes — predicated upon the belief that markets do not automatically self-correct, and that government intervention is sometimes necessary — were embraced in Washington in the wake of the Great Depression. He chronicles how the opposing ideas of Milton Friedman — who believed that free markets functioned efficiently without bureaucratic interference — gained ascendancy with the election of Ronald Reagan and the abrupt collapse of the Soviet Union. And he charts how the deregulation movement accelerated during the administrations of Bill Clinton and George W. Bush, arguing that it created an “indomitable zeitgeist” that would set the stage for disaster.

Regarding the differences between advocates of government intervention and those who contend that free markets operate better on their own, Mr. Hirsh says that such arguments, boiled down, are “largely about the issue of human rationality versus irrationality. One side holds that markets are basically rational and efficient on their own — that they are an optimal way for societies to allocate resources — and governments only interfere. The other side holds that markets and the people who make them up often behave irrationally, inefficiently and unjustly, and therefore the best course is to keep government involved at all times.” (emphasis added)

I am going to have to add this one to my credit crisis book queue . . .

Category: Bailout Nation, Bailouts, Books, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

6 Responses to “Capital Offense: How Washington’s Wise Men Turned America’s Future Over to Wall Street”

  1. thenewguy11 says:

    And government always behaves rationally I suppose? One of the causes of the current crisis brought up time and time again was the low interest rates brought to you by the very same “government” that we are somehow expected to believe will save us from ourselves. The Greenspan Put wasn’t exactly a bow to the free market either.

  2. “…Michael Hirsh and Jonathan Alter: One-on-One
    Jonathan Alter: Your book starts by tracing three decades of Washington history from the Reagan era on. Why is understanding that history so important?

    Michael Hirsh: You can’t understand what happened on Wall Street without first understanding what happened in Washington. Things of this magnitude—the worst financial crash and economic downturn since the Great Depression—don’t just occur because of a subprime mortgage bubble and a bunch of crazy traders in New York. It is only comprehensible as story of an entire era, a zeitgeist that defined the post-Cold War period. That’s my story. It began as the Reagan Revolution of 1981, which launched a deregulation movement that unmoored much of the economy from government oversight and antitrust laws, creating the wild age of finance with which we’ve all grown up. The failure was huge, systemic and bipartisan. The Clinton administration was as much to blame as the second Bush administration. For nearly 25 years, the facts on the ground seemed to bear out the idea that markets may overreach and go up and down, but they are always smarter than governments. The deregulatory ’80s were a boom time. The ’90s were better. The end of the Cold War turbo-charged the whole process. Free-market absolutism went from being a mocked, maverick ideology—something identified in the ’60s and ’70s with Barry Goldwater and William F. Buckley—to a kind of national secular religion. It seized control of the national agenda and shifted the axis of the entire economic debate sharply rightward, turning ordinary Republicans into small-government zealots and liberal Democrats into “Eisenhower Republicans” (that’s what Bill Clinton mockingly called himself.) It was only because of this environment – this all-conquering ideology– that Wall Street and its lobby got away with as much as it did. Remember, the instruments that became notorious after the subprime collapse—collaterized debt obligations or CDOs—didn’t come out of nowhere either. They were allowed to flourish and develop, grow ever more complex, for two decades. Despite regular market blowups – LTCM! Enron! – the only change that occurred was even more deregulation. CDOs were only the latest, “improved” version of a model long in the making, the process of turning dubious or bad assets into better-seeming securities while the adults on the playground—the regulators and central bankers–weren’t watching….”

    How is it: “… It began as the Reagan Revolution of 1981, which launched a deregulation movement that unmoored much of the economy from government oversight and antitrust laws…”

    -when the de-Regulation of the Economy, actually, began under ol’ #39, J.E. Carter (?)

    and, with: “…while the adults on the playground—the regulators and central bankers–weren’t watching….”

    isn’t he hoisting his Thesis on its own petard?

    “…add this one to my credit crisis book queue . . .”


    add it to the ‘Agitprop’-file, as well..

  3. bigbases says:

    To the best of my knowledge, market places, as well as government bureaucracies are composed of people. Is there any reason to believe that the guys and gals who work for a government are any less vulnerable to the foibles and failings of the folks who make their living in the marketplace?

    Stretching things a bit, might we not say that the role of the marketplace is to guard against the excesses and irrationality of government bureaucracies?

  4. jcardillo says:

    Is it not conceivable that the market and government should balance each other? Why should we throw out the possibility of all government regulation just because some of it is, well, horrible?

    As both market & government are made up of irrational actors, it seems to me the solution is a mix of both. The free market seems to be quite good at reacting to (or changing) whatever the government throws at it, yet the government seems to be completely incapable of reacting to what is clearly a dysfunctional system.

  5. victor says:

    Not all in us is irrational, studies show that when we act collectively, irrationality is less prevalent. Manias do happen and at the root of manias is avarice (greed), one of the seven deadly sins so graphically depicted in the Middle Ages by the likes of Dante . Let’s recognize that we are far from perfect, prone to failure over and over again, that we are subject to the vicissitudes of life (black swans). Then we could dispose of all the lamentations about what caused this downturn, or that crisis and this mess and what the role of the Government in all this should be. Start by taking Nassim Taleb’s advice on a black swan robust economy. Merry X-Mass to all,

  6. david2 says:

    yes the lions look like old goats but that is true of any mag cover boys 15 years later

    but now everybody expects govt bailout and moral hazard is routine

    what to do????