"Consider that government intervention might have led banks and other organizations to take on risks that they never should have."

Via Cafe Hayek, a good article by Steven Horwitz:

"However well-intentioned the attempts were to extend homeownership to more Americans, forcing banks to do so and artificially lowering the costs of doing so are a huge part of the problem we now find ourselves in."

Don't buy it. Poor loans are poor loans.

"What's interesting is that the rise in prices affected most strongly cities with stricter land-use regulations, which also explains the fact that not every city was affected to the same degree by the rising home values."

Fine. Houses are more expensive. Doesn't justify poor loans.

"While all of this was happpening, the Federal Reserve, nominally private but granted enormous monopoly privileges by government, was pumping in the credit and driving interest rates lower and lower. This influx of credit further fueled the borrowing binge. With plenty of funds available, thanks to your friendly monopoly central bank (hardly the free market at work), banks could afford to continue to lend riskier and riskier."

Sorry. Wrong again. Poor loans are poor loans.

"Yes, banks were "greedy" for new customers and riskier loans, but they were responding to incentives created by well-intentioned but misguided government interventions. It is these interventions that are ultimately responsible for the risky loans gone bad that are at the center of the current crisis, not the "free market."

Here he's absolutely correct. This implicit guarantee by the government and Fed to intervene can explain why poor loans might be bet on. The risk is lowered.

"It is when corporations can use the state to rig the rules in their favor that the negative effects of their power become magnified, precisely because it has the force of the state behind it. The current mess shows this as well as anything ever has, once you realize just what a large role the state played. If you really want to reduce the power of corporations, don't give them access to the state by expanding the state's regulatory powers. That's precisely what they want, as the current battle over the $700 billion booty amply demonstrates. "

This is true. The government had acquiesced to these implicit and explicit guarantees, which these banks and investors wanted.

"The eventual bursting of the bubble and their subsequent losses are, to many of us, their just desserts for rigging the game and eventually getting caught. To reward them again for their rigging of the game is not just morally unconscionable, it is very bad econonmic policy, given that it sends a message to other would-be riggers that they too will get rewarded for wreaking havoc on the US economy. There will be short-term pain if we don't bailout these firms, but that is the hangover price we pay for 15 years or more of binge lending. The proposed bailout cannot prevent the pain of the hangover; it can only conceal it by shifting and dispersing it among the taxpayers and an economy weakened by the borrowing, taxing, and/or inflation needed to pay for that $700 billion. Better we should take our short-term pain straight up and clean out the mistakes of our binge and then get back to the business of free markets without creating an unchecked Executive branch monstrosity trying to "save" those who profited most from the binge and harming innocent taxpayers in the process."

Here, he's completely wrong. Guarantees are guarantees. We need to honor them. As well, the system was so out of whack that the fallout of a hands off policy is being extraordinarily minimized. Just check out the bankruptcy of Lehman. This is pure wishful thinking, which we've had enough of.

"My point is that hoping that having the "right people" in power will avoid these problems is both naive and historically blind."

Put this way, I never understand this comment. It should apply to the police, courts, military, etc., and yet we need them. It is much better to say that regulations rely on regulators and can't be relied on to solve all our problems.

"Consider that perhaps government intervention, not free markets, caused profit-seekers to undertake activities that harmed the economy. Consider that government intervention might have led banks and other organizations to take on risks that they never should have. "

This is true.

"Consider that government central banks are the only organizations capable of fueling this fire with excess credit. And consider that various regulations might have forced banks into bad loans and artificially pushed up home prices. Lastly, consider that private sector actors are quite happy to support such intervention and regulation because it is profitable. "

At most, these are necessary, but not sufficient conditions. They do not explain the poor investments because they do not minimize risk. At best, they increase profits, but all profits must be reasonably judged by their risk. Focus on the risk.

The solution going forward is to not have the government subsidizing risk, or, where it does, restrictions on the risk that is allowed. This is not impossible.