When you look at most catastrophes, they're almost always a "confluence" of events, where if you were to remove any one of the components, the catastrophe generally would have been averted or at least the end result would have been drastically reduced.
The housing bubble is obviously complicated....but it's this type of regulation that created the problem in the first place. When you "fix" free markets through regulations, many times, the results have many unintended consequences which are impossible to anticipate.
That is a huge tenet of libertarianism...that the government solution should be the last option, because free markets are inherently self correcting....it's only when the government interferes and tries to fix it till it's broken.
Liberals would argue that it's lack of regulation that caused the whole mess, and they miss the boat.
The housing burst started with the Community Reinvestment Act of 1977. (You can thank Barney Frank and crew). That actually forced banks to make high risk loans to "sub prime" underqualified lenders.
Without this new supply of sub prime loans, the demand for housing that became gluttony would never have been possible. The "sub prime" mortgage is essentially, the fuel which fed the fire. With no fuel, you can have all the spark and fire hazard you want with no inferno.
Combine government backed and invested sub prime mortgages through FHA/FNMA/Freddie with mountains of monopoly money supplied by the Fed (a discussion for another time) and you end up with a market that's rife with fraud waste and abuse. Crooks are crooks, they always have been, so by the government sponsoring FHA and subprime loans, all they did was allow the crooks to feed upon people who many times, didn't know any better.
Furthermore, it's government "regulation" through our bailout of the banks that perpetuates this crap. Had we not bailed them out, they'd be self governing themselves....as investors and boards would require their own internal regulations to protect their own PRIVATE capital investments.
When you add on the obscurity of bond ratings for credit swaps and the difficulty in assigning risk to an asset that's blended with all sorts of varying degrees of loan default rates, and now you have a system that as I said...started out with good intentions (help the little guy get a house and make sure the banks don't fail and hurt us all) and what you end up with is a recipe for giant disaster.
You have to ask yourself....why would the government have to come to the aid of any private entity? Because no private investors are confident to put their own skin into it.
If we remove the subprime market, or the Fed, even with crooked mortgage brokers, there are no funds to loan frivolously and no victims to feed upon....the skeezy mortgage brokers all go out of business. Even if you have crooked bond rating companies, there are no loan packages full of high risk loans to screw up the ratings to otherwise responsible investors. Even if you have irresponsible builders who over supply, there's no excess demand because again, there's no huge influx of subprime market buyers.
The bottom line is that it was government interference that got us into this mess, and unless you're able to accurately recognize ROOT CAUSE, then more government interference is exactly what people are clammering for and exactly NOT what we need.
We need free markets that correct themselves where firms are motivated by greed AND fear....fear of competition, fear of failure.....etc. What we have now is greed with little fear and you can't "inject" artificial fear into the system via regulations.....they'll just be a smarter group of crooks who find a way around it. You have to have a natural, free market that corrects itself...it's the only thing that seems to be too smart or beyond manipulation by crooks.
I'm not saying all regulation is bad....we have to have some....I'm just saying that when you monkey with free markets, you'd better be prepared for undesirable and unintended consquences (including a false sense of safety).
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