Friday, January 30, 2009

Regulatory Statism, (that's Government) Is What Precipitated the Banking Crisis

So says Mike Oliver (Mr. Integrity) guest-blogging at Samizdata:

"The lovers of statism (and of we the people) decided to pull out all the plugs and defend the market at each and every low - to try to fake reality. Instead they super-charged the downside. What would have been a normal correction in the market ballooned into a disaster. Why?

Benanke allowed in summer of 2007 for an asset class never previously allowed to be used as collateral in fed borrowings by financial institutions, and even expanded what institutions could come to the Fed. In effect the Fed was "pricing" this debt (sub prime mortgages, etc.) at a level such that it would not have to hit the market and be priced openly and fairly.. The Fed was apparently afraid of the real consequences of seeing it priced openly. So they in effect took it off the market and froze it at the Fed window as "acceptable collateral" but as an unpriced asset. Hence from that point forward these sorts of assets on bank books were not "priced" in an open and market manner. Hence those who wanted to invest in the bank were uncertain as to the value of these assets. Hence uncertainty arose as to any and all bank valuations."

Read it all, of course.
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