What Caused the 2008 Financial Crisis: Market Distortions or Market Failure? A Debate

Former BB&T Bank CEO John Allison vs. Moody's Mark Zandi

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What Caused the 2008 Financial Crisis: Market Distortions or Market Failure? A Debate

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Was the 2008 financial crisis caused by market distortions or market failure?

That was the topic of a public debated hosted by the Soho Forum in New York City on February 20, 2019. It featured John Allison, former CEO of BB&T Bank and former CEO and president of the Cato Institute, and Mark Zandi, the chief economist of Moody's Analytics. Allison argued that market distortions led to the financial crisis, and Zandi attributed the crisis to market failure. Soho Forum Director Gene Epstein moderated.

It was an Oxford-style debate, in which the audience votes on the resolution at the beginning and end of the event, and the side that gains the most ground is victorious. Allison prevailed by convincing about 10 percent of audience members to change their minds.

Today Allison is an executive in residence at the Wake Forest School of Business. He's author of The Financial Crisis and the Free Market Cure: Why Pure Capitalism is the World Economy's Only Hope (McGraw-Hill, 2012). Zandi is the author of Financial Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis.

The Soho Forum, which is sponsored by the Reason Foundation, is a monthly debate series at the SubCulture Theater in Manhattan's East Village.

Music: "Modum" by Kai Engle is licensed under a CC-BY creative commons license.

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Comments

[loveconstitution1789]

Government was the leading cause of the 2008 financial crash and the duration of recovery period.

[creech]

But the Democrats in the Congress they controlled introduced bill after bill starting in 2007 that would have headed off the crash. Didn't they? Didn't they? If not, how can they continue to blame Bush II instead of acknowledging a bi-partisan fuckup?

[Titanian]

Because they're garbage people.

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[MarioLanza]

Under Clinton, the GSE's, Freddie Mac and Fannie Mae, were pressured to issue subprime mortgages. The Bush administration came to Congress repeatedly and asked to rein in the problem. Each time they were rebuffed by the likes of Barney Frank and Maxine Waters - they were "offended" at the suggestion that the GSE's were anything but financially solid.

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[Hank Phillips]

Geithner understood the crash, and by keeping it quiet, the Administration was able to export the policies that caused it, then short the securities and currency of all that trusted American altruism. TARP simply cashed in on the exportation o coercion and financial collapse. It all centers on the word "willing" (as opposed to confiscated at gunpoint) in the Law of Supply and Demand. Adam Smith called it "the violence of law."

[An Innocent Man]

High gasoline prices.

[$park? is the Worst]

Who cares? That was 11 years ago.

[MarioLanza]

Yeah, it's not like history could repeat itself. https://tinyurl.com/y3y7sujp

Big government (the Clinton administration) told Fannie Mae/Freddie Mac to make these subprime loans. Big government then refused to rein them in (Barney Frank and Maxine Waters).

Big government bought votes with these subprime mortgages. Using the federal purse to buy votes. That's what big government did and still does. Yes, we should be worried about it.

[John]

Even if it was government that caused it, that doesn't mean bubbles and crashes can't and don't happen in the market. They do. The negative effects of government policies need to be pointed out. But, don't let those effects fool you into thinking markets never boom and bust. They always do. It is the nature of the market.

In a sense Sparky is right. Who cares? Even if it was "the market", that says nothing about markets anyone who understand them shouldn't already know.

[loveconstitution1789]

We can learn from the mistakes of the 2008, never do TARP again, get rid of Fannie Mae and Freddie Mac, and get rid of the term "too big to fail".

[John]

Sure. But we shouldn't sell that as getting rid of financial booms and busts.

[MarioLanza]

A liberal Republican oversaw a financial crash was then followed by a more liberal democrat who implemented big government solutions that made the downturn into a financial catastrophe.

That has no happened twice.

[Ray McKigney]

And stop encouraging people to take out loans for houses they can't afford, and stop encouraging lenders to make loans to people who can't afford them. Even if those people are intersectioned up the yingyang.

[Longtobefree]

The way you avoid 'too big to fail' is to let the states run everything not specifically directed to the federal government in the constitution.

Nothing says 'stay small' like fifty conflicting sets of laws and regulations, right?

It is way harder to bribe enough politicians on each state then on one federal behemoth.

[CharlesWT]

A contributing factor was price controls. The Fed setting below market prices on the future value of money. Nothing pumps up bubbles like artificially low interest rates.

[John]

Very true.

[tlapp]

Government and Federal Reserve intervention make the far larger and longer lasting. In the case of housing had the government in concert with the Fed not mandated more subprime loans with the threat of cutting off Fed funding for those banks that did not meet ever increasing targets for more subprime loans there would have been no crash.

[Colossal Douchebag]

Actually it was me. Sorry everybody! My bad. I promise I'll be more careful next time.

[Rat on a train]

I contributed by taking a penny from the tray at the convenience store.

[Sevo]

Transcript, please.

[Johnny Galt]

The premise of a "market failure" is utter rubbish. Markets can't "fail," they just give results that upset people.

Nor was it "too much" or "too little" regulation, but simply "too stupid" regulations that resulted in the crash. Allowing the bedrock of the global economy, home ownership, to be the basis of derivative trading instruments (pure gambling) was like letting kindergartners play with hand grenades. The final nullification of what was left of Glass Steagel was likewise moronic. Why aren't the people who passed these laws in jail for life?

[Longtobefree]

Why aren't the people who passed these laws in jail for life?

Democrats, that's why.

[a ab abc abcd abcde abcdef ahf]

No, markets are continually failing, just as humans walking are continuously falling. Market failures are signals that "Here be opportunities". If markets never failed, there would be no progress.

[Juice]

Glass-Steagall or the lack thereof had nothing to do with the crisis.

[blondrealist]

I agree. Some of the leading bad players would not have come under Glass-Steagall jurisdiction. CountryWide Credit was a retail mortgage originator - and would not have been subject to Glass-Steagall.. Bear Stearns and Merrill Lynch were investment banks - also not under Glass-Steagall jurisdiction. Same for AIG. Some have argued that the repeal of Glass-Steagall allowed too much speculation in mortgage-back derivatives, credit default swaps, and so on - and perhaps that's partly true. As to regulatory oversight - I think that the regulators did a lousy job of enforcing what was on the books back then.

[awildseaking]

This. The technical definition makes no sense. Apparently any inefficient market is a market failure, yet no market is ever in equilibrium because it's like a mathematical limit. Markets can become as close to perfect as possible, but no such thing as a "market success" exists because it isn't possible. Markets are always changing and perhaps there was a market that was one perfectly efficient, but it probably only lasted for a minute.

[nrob]

To steal Jordan Peterson's line "it's like riding a snake"

[awildseaking]

This. Market failure is technically defined as an inefficient market, but there's no such thing as a perfectly efficient market. Market equilibrium is like a mathematical limit. Markets can become more efficient, but never perfect. To suggest that this is a failure is complete bullshit. There's no such thing as a "market success."

[DajjaI]

I agree government policy caused the crash. But it wasn't as simple as "Fannie and Freddie" (and CRA). The Mortgage Interest Tax Deduction was hugely destructive, because it created impossible-to-value financial instruments like CDOs that were sold as snake oil to pension funds and big banks around the world. Another cause was government-chartered ratings agencies, which were not accountable to consumers (only to the issuers). The problem was compounded by governmental regulations of pension funds and global banks requiring purchase of AAA+ rated securities. Of course, the ratings were meaningless.

[John]

I don't see how the mortgage interest deduction created CDOs. What does one have to do with the other?

[DajjaI]

The MITD created 30 year mortgages, which were bundled into CDOs. Oh, you would still get a 30 year mortgage even without the deduction? Well then, you're an idiot and nothing the government can do will help you.

[a ab abc abcd abcde abcdef ahf]

The Clinton admin (and probably others before) pushed home ownership as a way to improve society and reduce crime. They leaned on the Fannies to increase home loans to minorities and the poor. What were bankers supposed to do, look the other way from the moral high ground while their competitors ate their lunch? That sure didn't help any.

[TrickyVic (old school)]

^ This.

[moneyshot]

The Bushpigs actually gave (not loaned) $10,000 down payments to first time homebuyers.

(I know, Peanuts will hate on me for blaming the GOP too)

[$park? is the Worst]

Peanuts hate you mostly because you use retarded words like Bushpigs.

[moneyshot]

"Bushpigs" accurately describes the Drunken Spending Big Government War Mongering GOP of 2001-09. It ended badly.

[Hank Phillips]

Then the Waffen Bush send SWAT teams and asset forfeiture narcs to confiscate those homes because of potted plant leaves. So narcs boot you out of the house, and after bail, jail, legal fees, fines and imprisonment you are still liable for the full mortgage. This happens to tens of thousands of homes... What could go wrong?

[BigT]

How would $10k gift cause a problem? (other than for the taxpayers) Banks still had to make foolish loans. And hedge funds still had to bundle these as assets for sale. Would it have been different if the $ had been from savings?

[moneyshot]

Caused demand and home prices to spike.

The root cause of the financial crisis was a bubble. Almost everyone thought "home prices only go up!". I heard that thousands of times.

When assets plummet in value all kind of bad things happen.

[BigT]

The root cause of the bubble was government encouraging bad loans to 'under-served' communities, and very loose monetary policy. $10k could only add a few buyers to the market, not force lower than market loan rates.

[TJJ2000]

Needle-picking Bush and RINO'S doesn't change the very platform goal of the GOP stance of a limited and Constitutional government.

So no, you don't get to blame the GOP on a whole; only Bush and RINO'S that supported something in complete opposition to the GOP platform (which coincidentally is the DNC Platform).

[JFree]

What were bankers supposed to do, look the other way from the moral high ground while their competitors ate their lunch?

Sounds a bit like - if all your friends decide to jump over a cliff, would you just follow them?

I'd have thunk that that's the sort of 'moral dilemma' that is resolved by kindergarten.

[nrob]

Well, go out of business now or ride the wave of government force/benefit and see where it leads. Not quite kindergarten level dilemmas

[Hank Phillips]

That movie did a good job of eliding asset forfeiture and prohibitionist raids on banks and brokerages, didn't it? Strippers, that's it... girls who dance nekkid were buying homes like they were 14th Street doorknocker earrings! Right?

[Rich]

Was the 2008 financial crisis caused by market distortions or market failure?

I don't know. Was the 1883 Krakatoa eruption caused by geological distortions or geological failure?

[TJJ2000]

geological distortions - being located in the "ring of fire" was definitely probably the biggest factor of eruption.

[Sam Grove]

Well, when you screw with markets they will appear to fail because you didn't foresee the consequences of screwing with markets.
Markets not only rule, but they will overrule attempts to contrive an outcome contrary to markets.

[TJJ2000]

+1000

[Hank Phillips]

There is a huge industry in drumming up audiences and platforms for explaining away market crashes without reference to taxes, asset forfeiture, confiscation of bank and brokerage accounts and publication of government plans for all these things. For 90 years rapt audiences have listened to circular reasoning about the Crash and Great Depression. The end game in every case is to blab about anything BUT the Jones $5000 fine and Ten years on a chain gang law passed right before Hoover's inaugural, or Willebrandt's expos? of The Inside of Prohibition. True, every major crash has coincided with looters-by-law raiding banks, but the goal is to make that seem like pure coincidence, not causality. After all, the fact that everyone dies--some of them killed by zealots enforcing sumptuary laws--doesn't mean all men are mortal, right? George Bush faith-based asset forfeiture pogroms? Coincidence, pure coincidence.

[BigT]

Your word salad needs some Russian dressing.

[nrob]

Thanks Pete Campbell, thanks.

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[MaleMatters]

Let's ask not WHAT caused the crisis but who.

According to the book "Reckless Endangerment," by Gretchen Morgenson, Bill Clinton thumped the first domino when he began pressuring the mortgage industry to approve in effect virtually anyone who breathes. This was to get the home-ownership rate up to an arbitrary percentage he picked out of thin air. We HUD employees at the time joked about it.

[grb]

This is laugh-out-loud hilarious. So Bill Clinton "pressured" the mortgage industry to loan to anyone, huh? Well, let's look at another example of pressure following the collapse : The federal government had just saved the banking industry with oceans of cash. Millions of people (myself included) had their lives decimated by the Great Recession. The entire world economy nearly collapsed because of cowboy capitalism which originated in this country. So what did the banks do? They gave their executives a massive round of bonuses. The media railed. Politicians screamed. People threatened lawsuits. Congress held hearing and proposed laws. And what did the banks do? They smirked and said, "To hell with you and everyone......"

Yet Bill Clinton "pressured" these same bankers to make bad loans ?!? And those poor little timid dears wilted under the pressure ?!? Let's try an alternate theory : Every loan made churned up big-dollar profit in the derivatives market, so they just made more and more loans to keep the profits coming.

Such a clean, simple and clear theory - even if it doesn't scapegoat Democrats.....

[TJJ2000]

Your stance holds a very glaring defect -- "Every loan made/churned up big-dollar profit". If the loaners were held responsible for the loans they made; there wouldn't have been ANY profit to the situation that resulted.

The government backed and subsidized those crooked and criminal actions by bankers (enabled it). "Cowboy Capitalism" would have never "enabled" anything and NATURAL/CAPITALIST consequences would've correct the corruption just like it has a billion times BEFORE all this socialistic law subsidized the corruption.

[TJJ2000]

And to add another very similar situation -- The socialistic system (The Federal Reserve) was enacted JUST 10-years before the GREAT DEPRESSION. It was sponsored as a "fix/save" (deter the natural consequences) of a few NYC banks that wrote loans/checks their butts couldn't support.

Did the governmental "fix" (dismiss the criminal actions) to that issue work?

Instead of holding those few NYC bankers accountable in criminal court and the natural course of bankruptcy the federal government had to monopolize/socialize the ENTIRE nations wealth supply as a "fix-it" pitched plan.

10-Years later that federal government "fix-it" plan of a local NYC criminal problem dismissed all banks across the nation of any consequences of their criminal action (no longer held accountable) and dropped the entire nations economy into the great depression. You're right -- criminal bankers laughed the whole way through; the government deemed their personal accountable a national (everyone's) matter.

Here's a clean, simple and clear theory -- EVERY single Socialist/Communist society has eventually collapsed because its very core principle is to *divert* personal action/accountability from its natural consequence/reward which is the complete OPPOSITE of term Justice. Socialism always takes and destroys what Capitalism has made.

[grb]

(1) No mention of Democratic villains "pressuring" banks to loan to the unworthy, which is good

(2) The mortgage derivatives market didn't emerge from government guarantees, but because it is profitable to trade paper vs - say - having to invest in inventing or making

(3) The mortgage derivatives market expanded because bankers thought they eliminated risk by bundling mortgages. Their formula overestimated the extent high-risk crap was safe thru offsetting solid loans, and underestimated the effect of any economic shock. The bundling also grew increasing reckless as profits went from a stream to tsunamic ocean.

(3) This created a demand on the ground for volume, and people writing loans knew anything at all would sell high-dollar up the chain.

See? Capitalists using capitalist logic to make capitalist (poor) decisions. Just like Dutchmen buying tulips. Bonus observation :

(1) Anyone who says the "federal government had to monopolize/socialize the ENTIRE nations wealth supply" is surely writing from a padded cell - probably loosed from his straight-jacket and allowed limited computer time. I hope it was therapeutic.......

[TJJ2000]

What do you think the Federal Reserve was created for if it didn't monopolize the means of wealth (the money)? You seem to have created a HUGE self-induced blind-spot for the ill effects of government (or probably any government measures)... but I guess you'd have to in order to blame capitalism - the very means of value creation.

It doesn't take a straight-jacket to know the government isn't the almighty correct god and know that the government doesn't create a single element of value (printing money doesn't print value).

[grb]

(1) And you seem to have a huge self-induced blind-spot for random capitalization

(2) One of the problems dealing with unhinged looney-toon rants is their bizarre non sequitur terms. What does "monopolize the entire nation's wealth supply" mean back on the planet earth? What does "socialize entire nation's wealth supply mean"? How did the Federal Reserve do either thing back in 1913, when it was created? Answer : It didn't. Economics-wise, you could have produced as much meaning with a random-word-generator.

(3) I criticized those capitalist practices of bankers which led to the Great Recession because those practices were criticism-worthy. Not that I expect anything like coherence from you, but you do believe that people practicing capitalism can make mistakes, right? Those mistakes can be criticized, right? That isn't too irreligious for you?

[TJJ2000]

(1) No blind-spot; I'm fully aware capitalism as well as society must have laws/criminal justice.

(2) Monopolize - Laws that requires ONE company (often itself) to be the sole provider/supplier of said product/service.

Socialize - Where the means of producing and distributing goods is owned collectively or by a CENTRALIZED government that often "plans and controls" the economy.

The Federal Reserve - 'Centralized' banking that is "planned and controlled" by the government.

Maybe not a perfect fit but far from a "random-word".

[TJJ2000]

(3) Here's were our ideology roots collides.

The mean of capitalism were control by the government through central banking in 1913 "TO FIX".. "capitalist practices" -->(yield) The Great Depression of 1929. The Governments Plan of Central Banking "TO FIX" obviously "DIDN'T FIX" and by order of problem/force was actually the "ANTI-FIX". Now go back and read #2 -- Government Central Banking Socialized the banking industry to a degree.

Step forward 77-years. Government through its "Central Banking" decides every poor person deserves a "Nice House" and to get there they used mandated/forced low interest (now having control over such things), subsidies, and federal guarantees (too big to fail) --> Great Recession.

When the whole time if the Government was used to insure personal justice; free-market banking would've done just fine or else the whole banking industry would be in prison. (Do you think it's JUST that they were guaranteed to be bailed from their criminal acts "laughed and gave out huge bonuses"?)

Its the same story with jacked up healthcare costs, education costs, housing costs (All lined with Government incentives and mandates). That is your 'blind-spot' I speak of.

[grb]

Wow. You really are a loon.....

(1) The Fed does one thing - one thing only : They make small adjustments to interest rates in an attempt to smooth the extremes of the business cycle and limit inflation.

(2) No part of that has anything to do with "laws that requires one company to be the sole provider/supplier of a product/service", or your : "the means of producing and distributing goods being owned collectively"

(3) So everything you've said is gibberish. My dog howling makes more sense on economics.

(4) As I patiently explained above, the housing bubble began as all bubbles do (see reference to Dutch & Tulips), because capitalists conned themselves into believing there wasn't any risk, then worked themselves into a frenzy chasing profit.

(5) Your : "Government through its "Central Banking" decides every poor person deserves a "Nice House" and to get there they used mandated/forced low interest (now having control over such things), subsidies, and federal guarantees..."

may exists on the dwarf planet Pluto, since apparently that's where your brain resides. It bears no relationship whatsoever to any factual reality here.

Are you a troll or a fool?

[TJJ2000]

Here - I'll just summarize that whole pointless comment into

grb;
(1) If anyone shows/tells me about all the items in my blind spot; they're a loon, a howling dog, has no sense on economics, a brain that lives on the dwar planet Plut, a troll or a fool.

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[JayJayTheTooth]

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[Mr. JD]

Markets cannot fail. Saying markets failed when bad behavior leads to bad results is like saying gravity failed when somebody dies after jumping off a building.

[TJJ2000]

^Thanks for this. Find it very thought provoking. So, Blaming the laws of cause and effect on the abstract term "Market" does nothing to dismiss the validity of the natural law.

Is that the basis of it?

[EirkKengaard]

The financial crisis was the result of government encouragement of risky behavior, and failure to properly regulate. Read between the lines in the The Final Report by The Financial Crisis Inquiry Commission. Andrew Cuomo at HUD leaned on the housing atgencies: in an effort to reverse decades of discrimination against blacks and Latinos, Mr. Cuomo pushed the government-sponsored banks, Fannie Mae and Freddie Mac, to buy more home loans taken out by poor and working-class borrowers.
https://www.nytimes.com /2010/08/24/nyregion/24hud.html

Congress, especially democrats, aided and abetted. Sen Dodd (friend of country wide). Maxine Waters (we do not have a crisis . . . under the outstanding leadership of Franklin Raines). Barney "dice roller' Frank

There are dozens of books on the crisis. Also some entertaining youtube videos. See "Burning down the house."

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