John Makin disputes the notion that our financial meltdown marks a case of ?market failure.? The American Enterprise Institute visiting fellow writes in Commentary:
The housing bubble was thus a fully rational response to a set of distortions in the free market ? distortions created primarily by the public sector. The heads of large financial institutions ? recognized the risk-taking subsidy inherent in public policy, but felt they had no choice but to play along or fall behind the other institutions that were also responding rationally to the incentives created by government intervention.
The housing collapse and its painful aftermath, including that $15 trillion wealth loss for U.S. households (so far) does not, therefore, represent a market failure. Rather, it represents the dangerous confluence of three policy errors: government policy aimed at providing access to home ownership for American households irrespective of their ability to afford it; the Fed?s claim that it could not identify bubbles as they were inflating but could fix the problem afterward; and a policy of granting monopoly power to rating agencies like Standard & Poor?s, Moody?s, and Fitch?s to determine the eligibility of derivative securities for what are supposed to be low-risk portfolios, such as pension funds.