The IEA on the Financial Crash

Ted Bromund / May 12, 2009

The Institute for Economic Affairs, the prestigious British think-tank, has released a comprehensive, two hundred page long, study of the causes of the financial crash. Its conclusion is that “Government failure had a leading role in creating the conditions that led to the crash.”

As the IEA sums it up, “It may be overstating the point to argue that the crash was caused by government failure but it certainly appears that there is nothing that governments and regulators have done that made the crash less likely or made its consequences less dire.” According to the IEA, central banks created a monetary bubble that fed an asset price boom and distorted the pricing of risk, while, in the U.S., government policy “encouraged high-risk lending through support for Fannie Mae and Freddie Mac.” The problem was not that regulators lacked the power to act: it was that they did not act, and to the extent they did, they incentivized opaque and risky behavior. (more…)