I wish I had written this essay, by Russel Roberts. It's about as good a synopsis of how screwed up things are: the crises we are facing aren't due to one or two evil overlords, but are endemic and systematic as things are right now.
The most culpable policy has been the systematic encouragement of imprudent borrowing and lending. That encouragement came not from capitalism or markets, but from crony capitalism, the mutual aid society where Washington takes care of Wall Street and Wall Street returns the favor. Over the last three decades, public policy has systematically reduced the risk of making bad loans to risky investors. Over the last three decades, when large financial institutions have gotten into trouble, the government has almost always rescued their bondholders and creditors. These policies have created incentives both to borrow and to lend recklessly.
It's an interesting take on the crisis, with a largely Austrian perspective. Lots of folks have problems with the Austrian school (largely because they haven't taken the time to actually read the works, relying instead on summaries which, especially on-line, tend to be negative), but that school certainly has some perspectives worth investigating.
And he points out, quite correctly, that Paul Krugman, despite having a Nobel in Economics, is a hack who actively denies empirical reality when it doesn't fit Krugman's story line.
Another key quote:
When the government implicitly backed Fannie and Freddie, it severed the usual feedback loops of a market system.
I've harped on this time and time again: markets are ruthless and don't care about politics. You can only rig the markets for so long: at some point markets correct themselves. Severing feedback loops of a market system makes market corrections catastrophic, rather than merely annoying.
The Austrian perspective emerges here:
Instead of trying to improve a system we only imperfectly understand, we would have better luck letting the natural restraints of capitalism reemerge. Rather than trying to turn this dial or push that lever the optimal amount (holding everything else constant, somehow), we should let natural feedback loops reemerge that encourage prudence as well as risk taking.
Rescuing people from the consequences of their decisions is bad for capitalism. It means that a distorted calculus of risk and reward allocates trillions of dollars of capital. The biggest mistake of the last decade of distorted incentives is that trillions of dollars poured into more and bigger houses instead of into better medical devices or new forms of entertainment or more efficient cars. It was a bad deal private decision-makers would never have made on their own. It was a bad deal that only took place because public policy distorted the incentives.
So true, so true: the fundamental problem facing us is that by ignoring the moral hazard issues and allowing the blow-up, all we've done at this point is to shift the problem, not solve it. The sovereign debt problem facing not only countries like Greece and Spain, but also the United States, is in many ways the culmination of a comedy of errors that has been propagated through the system.
It's just that it's not very funny any more.