That the collapse of Lehman Brothers was the final explosive device that rocked the world financial system is beyond dispute. But why and how Lehman Brothers was allowed to fail is another story told with new insight in the latest book, The Fed and Lehman Brothers: Setting the Record Straight on a Financial Disaster, by Johns Hopkins University economist Laurence Ball. In Ball’s view, Lehman did not have to fail and was instead executed by agencies of the U.S. government.While intervention by US regulatory authorities was no doubt the key moment when the entire house of cards that had built up around the 'housing bubble' began to collapse. Any rational person who had looked at the kind of loan terms that were being offered under the rubric of "subprime mortgage" could see how predatory they really were. There was no expectation that these loans would be paid back, and banks were expecting to repossess the property itself in lieu of payment - making their money on the ever escalating property values. The emergence of so-called "NINJA Loans" (No Income, No Job or Assets) which were solely predicated on the idea that unpaid loan amount would be recouped via the escalating property value is pretty much prima facie proof that the banks making such loans had shed any semblance of ethical business practices for naked greed.
Massive national institutional resources — government and private — were ultimately corralled and coerced into government-mandated programs that were ultimately designed to provide mortgages to people who had no money to make down payments and insufficient income to carry a mortgage. Between 1995 and 2007, trillions of dollars flowed into housing people could not afford.The error in Corcoran's logic here is that he supposes the entire failure is a result of government regulation intervening in the market. I disagree. First, Mr. Corcoran misunderstands the idea of socialism, confusing it with regulation. While I realize that many in the more "libertarian" wings of the political right believe that the "invisible hand" will correct the excesses that unregulated markets a prone to, the objective evidence is far clearer: without regulation, unregulated markets inevitably collapse to the detriment of all. Whether that is the Stock Market Crash of 1929, the Enron Collapse, or the Subprime Mortgage Crisis, all of them point to situations where weaknesses in the markets were being exploited for greater gain by the most avaricious.
Where the US government erred was in failing to have in place an appropriate regulatory regime for the housing market in the first place. A lack of clear standards on who qualified for a mortgage, what the criteria for mortgage terms would be, and a host of other factors created an environment where it became possible to turn what used to be a "second mortgage" or a "line of credit" secured against a home suddenly being structured into what would become a "subprime" mortgage. At the time, the ethos in the US government was very much "don't intervene in the markets". Canada's comparatively successful weathering of the 2008 recession is clear evidence that appropriate regulation of the markets is in fact an important aspect of ensuring that our own financial institutions weathered the storm. By the time the US government intervened in an overheated housing market, they were trying to stop the bleeding, rather than cure the problem - free market fundamentalists in Congress would have screamed blue murder had the government taken the correct actions of intervening in the market before a "natural correction" collapsed everything.
The crisis of 2008 was not a product of capitalism or markets or the inherent greed of bankers. It grew out of populist political posturing and manipulation of the market economy to attain social objectives. It was a colossal failure of socialism for the poor.In his conclusions, Mr. Corcoran returns to what appears to be an almost libertarian perspective. More or less, "if you aren't among the hallowed wealthy, screw you". To be honest, the analysis in Mr. Corcoran's article is so flimsy and devoid of context, that it leaves one wondering why he wrote it. The assumptions he makes are so transparently libertarian in their tone that I wonder if he is positioning himself to become a cheerleader for Maxime Bernier.