Government intervention is once again wreaking havoc on the U.S. financial system and the economic security of millions of Americans—a tragic replay of previous crises. In 2008–2009, for the second time this decade (the first being 2000–2002), the value of U.S. publicly-traded stocks has plunged by 50 percent—but this time with an additional plunge in the median home price, which has dropped 23 percent from its peak in 2007. Thus American households have suffered declines of $8 trillion and $4 trillion, respectively, in the value of their two key assets—stocks and homes—and a 20 percent drop in their net worth, from its recent peak. Meanwhile Washington policymakers have mired Americans in yet another recession, with declining output, stagnant income, and a rising jobless rate. The current recession is not yet as severe as many prior ones, but it will worsen if interventions intensify.

Relative to past economic downturns, few financial institutions have faltered or failed amid the economic turmoil of 2008–2009, but those that have include some of America’s largest and most famous names, such as Merrill Lynch, Bear Stearns, Lehman Brothers, Citicorp, AIG, Washington Mutual, Wachovia, and Countrywide Financial. Since last fall, Washington has only further fueled a crisis that began modestly in 2007, by bypassing bankruptcy courts and instead bailing out or nationalizing these firms, or forcing healthy firms to absorb them (thereby weakening the healthy ones). Whereas since mid-2007 U.S. stocks generally are down 50 percent, those of large U.S. financial institutions have plunged 80 percent, the worst performance since the Great Depression. With every new government intervention in the sector, there has been only a quickening of capital flight and stock-price declines.

What caused the current financial crisis? If most economists, politicians, and commentators are to be believed, the cause is capitalism and its inherent greed. According to Democrat presidential candidate Barack Obama, “we excused and even embraced an ethic of greed”; “we encouraged a winner-take-all, anything-goes environment”; and “instead of establishing a 21st century regulatory framework, we simply dismantled the old one.”1 As a senator last fall, Obama decried as “an outrage” the need for a bailout plan “to rescue our economy from the greed and irresponsibility of Wall Street” (and then promptly voted for it).2 GOP presidential candidate John McCain said the financial crisis was caused by “greed, corruption, and excess,” as Wall Street “treated the American economy like a casino.”3 With the New York Times in December, President Bush “shared his views of how the nation came to the brink of economic disaster,” citing “corporate greed and market excesses fueled by a flood of foreign cash,” concluding that “Wall Street got drunk.”4 In his New York Times column, Paul Krugman, recipient of the Nobel Prize in economics in 2008, repeatedly blames the crisis on “deregulation” and free-market “dogmas.” Alan Greenspan—who for twenty years headed the Federal Reserve as Washington’s money monopolist and top bank regulator—told Congress last fall that “those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity, myself especially, are in a state of shocked disbelief,” agreed that it was a “flaw” in his ideology, and called for still more government regulation—which led many journalists to declare, with glee, that “Greenspan Admits Free Market Has Foundered.”5 The Washington Post traces the crisis to a U.S.-led “crusade to persuade much of the world to lift the heavy hand of government from finance and industry,” to “spread the gospel of laissez-faire capitalism,” and claims that this “hands-off brand of capitalism” only “sickened the housing market and allowed a freewheeling Wall Street to create a pool of toxic investments that has infected the global financial system.”6

The usual greed-blaming, anticapitalist interpretations cited above have fueled massive interventions in the U.S. financial sector in recent months, including partial nationalizations. America’s largest bank (Citigroup) and largest insurance company (AIG) are now effectively owned and controlled by the U.S. government, through the Federal Reserve and Treasury Department. Since October Washington has sunk nearly $500 billion of taxpayer funds into the shares of America’s four hundred largest banks, failing and healthy alike—often against the will of senior management.7 . . .


1 Barack Obama, “Renewing the American Economy,” transcript of speech at Cooper Union, New York Times, March 27, 2008.

2 Obama, floor remarks prior to voting for the Emergency Economic Stabilization Act, October 2, 2008.

3 Rick Klein, “McCain Blames Greed for Wall Street Mess,” ABC News, September 16, 2008.

4 Jo Becker, Sheryl Gay Stolberg, and Stephen Labaton, “White House Philosophy Stoked Mortgage Bonfire,” New York Times, December 20, 2008, p. A1.

5 Jay Bookman, “Greenspan Admits Free Market Has Foundered,” Atlanta Journal-Constitution, October 27, 2008; Scott Lanman and Steve Matthews, “Greenspan Urges Tighter Regulation After ‘Breakdown,’” Bloomberg News, October 23, 2008.

6 Anthony Faiola, “The End Of American Capitalism?” Washington Post, October 10, 2008, p. A1.

7 Martin Crutsinger, “U.S. Summons Banks to Meeting on Rescue Plan,” Associated Press, October 13, 2008; Mark Landler and Eric Dash, “Drama Behind a $250 Billion Banking Deal,” New York Times, October 15, 2008, p. A1.

8 Jim Kuhnhenn, “Obama Caps Executive Pay at $500,000, Tied to Bank Bailout Money,” Associated Press, February 4, 2009.

9 Jeanne Cummings, “Bailout Tops $8 Trillion,” Politico, December 16, 2008,

10 “What’s Next?” Economist, September 20, 2008, p. 19.

11 Cf. Ayn Rand, Capitalism: The Unknown Ideal (New York: The New American Library, 1966), pp. 19–20.

12 Closing the Gap: A Guide to Equal Opportunity Lending, Federal Reserve Bank of Boston, Excerpt: “Did You Know? Failure to comply with the Equal Credit Opportunity Act can subject a financial institution to civil liability for actual and punitive damages in individual or class actions. Liability for punitive damages can be as much as $10,000 in individual actions and the lesser of $500,000 or 1 percent of the creditor’s net worth in class actions” (p. 10).

13 Alan Greenspan, “Understanding Household Debt Obligations,” the Credit Union National Association, Governmental Affairs Conference, Washington, D.C., February 23, 2004,

14 Steven A. Holmes, “Fannie Mae Eases Credit to Aid Mortgage Lending,” New York Times, September 30, 1999.

15 Cited in Becker, Stolberg, and Labaton, “White House Philosophy Stoked Mortgage Bonfire.”

16 “White House Conference on Increasing Minority Homeownership,” October 15, 2002 (see full speech at

17 Cited in Becker, Stolberg, and Labaton, “White House Philosophy Stoked Mortgage Bonfire.”

18 Chris Reid, “Zero-Down Mortgage Initiative by Bush is a Hit; Congressional Budget Office Says Plan Likely to Spur More Loan Defaults,” Boston Globe, October 5, 2004.

19 Franklin Raines, “Chairman’s Message,” National Housing Survey 2003: Understanding America’s Homeownership Gaps, Fannie Mae, Washington, D.C.,

20 James R. Healey, “Taxpayers Take on Trillions in Risk in Fannie, Freddie Takeover,” USA TODAY, September 7, 2008.

21 Alan Zibel, “Documents Released by House Committee Show Fannie, Freddie Ignored Warnings on Risky Mortgages,” Associated Press, December 9, 2008.

22 Charles Duhigg, “Pressured to Take More Risk, Fannie Reached Tipping Point,” New York Times, October 5, 2008, p. A1.

23 Lew Sichelman, “Mozilo: End Downpayment Requirement,” National Mortgage News, February 17, 2003.

24 Angelo Mozilo, “The American Dream of Homeownership: From Cliché to Mission,” a lecture sponsored by the Joint Center for Housing at Harvard and the National Housing Endowment, Washington, D.C., February 4, 2003,

25 Charles Gasparino, on-air financial reporter, CNBC, January 10, 2008.

26 George Soros, “The Right and Wrong Way to Bail Out the Banking Sector,” Financial Times (London), January 22, 2009.

27 Barney Frank, opening remarks, hearings of the House Financial Services Committee, February 11, 2009.

28 Jamie Dimon, interviewed on CNBC, December 11, 2008.

29 Paul Volcker, “The Role of Central Banks,” in Central Banking Issues in Emerging Market Economies, symposium sponsored by the Federal Reserve Bank of Kansas City, 1990, pp. 2–3,

30 Remarks by Fed Governor Ben S. Bernanke, “On Milton Friedman’s 90th Birthday,” November 8, 2002,

31 See Richard M. Salsman, Breaking the Banks: Central Banking Problems and Free Banking Solutions (Great Barrington, MA: American Institute for Economic Research, 1990); and “Breaking the Banks,” The Intellectual Activist, vol. 5, no. 5, October 17, 1990.

32 Richard M. Salsman, The Collapse of Deposit Insurance–and the Case for Abolition (Great Barrington, MA: American Institute for Economic Research, 1993), p. 21.

33 See Richard M. Salsman, “Why We Need Free Banking,” Research Report, vol. 57, no. 11, American Institute for Economic Research, June 4, 1990; “Banking Without the ‘Too-Big-To-Fail’ Doctrine,” The Freeman, vol. 42, no. 11, November 1992; and Gold and Liberty (Great Barrington, MA: American Institute for Economic Research, 1995).

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