...communism caused the subprime crisis! So goes the logic of Gerald O'Driscoll, in an essay for Reason magazine.

The pricing of these financial products was the product of complex economic models, not the outcome of market transactions. As the value of the underlying homes and mortgages declined, pricing of the financial exotica became nearly impossible. ... There is a wonderful parallel here to the collapse of the Soviet Union. As the great Austrian economist Ludwig von Mises argued almost 100 years ago, central planning inevitably fails because there are no market prices to allocate resources. Market prices can only be the outcome of actual market transactions among buyers and sellers. Planners used mathematical formulas to value resources, especially capital. Now Wall Street wizards have imported Soviet thinking to allocate financial capital. Is it any wonder that it failed?
You see? The problem was not enough market forces! I do have one question for O'Driscoll though: Why didn't the competitive forces of the market on Wall Street -- which were absent in the Soviet Union -- result in accurate economic models to price these financial products? O'Driscoll also tries to place some of the blame for the subprime crisis on the Community Reinvestment Act (CRA):
The second factor contributing to the housing market collapse was the federal government’s commitment to “affordable housing.” Lenders, especially Fannie Mae and Freddie Mac, were pressured into promoting housing to low-income groups that could not qualify for normal loans. That policy is predicated on the belief that there is an underserved group of people who, but for economic discrimination or some other market failure, would be homeowners.
The CRA was enacted in 1977. So how did the CRA not cause a subprime crisis for 25+ years, and then suddenly cause one in 2006? Keep in mind that the CRA doesn't actually require banks to lend to low-income or minority groups, and that it was significantly weakened in 2005. Believe it or not, not every bad thing is caused by "government interference" in the market. I swear, it's true.


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