A Government Failure. Nothing Else.

Professor Steven Horwitz's "An Open Letter to My Friends on the Left" is a must read. An excerpt:

Consider instead that the problems of this mess were caused by the very kinds of government regulation that you now propose. Consider instead that effects of the profit motive that you decry depend upon the incentives that institutions, regulations, and policies create, which in this case led profit-seekers to do great damage. Consider instead that the regulations that may have been the cause were supported by, as they have often been throughout US history, the very firms being regulated, mostly because they worked to said firms' benefit, even as they screwed the rest of us. Consider all of this as you ask for more of the same in the name of fixing the problem. And finally, consider why you would ever imagine that those with wealth and power wouldn't rig a new regulatory process in their favor.

Long story short, what we are seeing in the credit markets is a government failure, not a market failure. The same people who want us to embrace "government as coolness", who, not uncoincidentally, are naive in their opinion that a belief in free markets comes from some knee-jerk response to government, seem to think that this problem was caused by deregulation. Maybe Horwitz's piece will at least sway liberal bloggers, who may ultimately disagree on the cure to this issue, to back off on their position on the cause because it is, I believe, incorrect. Also, a change of heart, not that I expect it, would go a long way to strengthening the possibility of the sort of left-libertarian alliance Mark tends to favor.

For more on how those subject to regulations end of being able to rig the game in their favor, I strongly recommend this post by Mark or this post over at the Amateur Economist (the Baptist and Bootleggers Dilemma).

Note: It doesn't necessarily mean that we oppose regulation (most libertarians support certain forms of regulation), but rent seekers make us very skeptical towards regulation, as it should be determined whether such regulations serve a valid public purpose (health, safety, welfare, etc.) or seek to prop up some favored interest group at the expense of others (i.e. labor unions). Most of us would support the former and deplore the latter. It's hardly a reflexive knee-jerk reaction to regulation.