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The Financial Crisis & The Free Market Cure

A Brief Synopsis

January 18, 2013

By Kyle Wiley

Recently John A. Allison, the longest-serving CEO of a top-25 financial institution and president of The Cato Institute, gave a lecture on his  book The Financial Crisis & The Free Market Cure. The lecture included some riveting material as to why free market capitalism is good for the economy and our only realistic hope of recovery. The question arises though why is John Allison such a leading authority on the crisis and how does he have all the right answers?

Allison served twenty years as Chairman of BB&T Corporation, the 10th largest financial services holding company headquartered in the United States and has various honorary doctorate degrees.

This adds to the validity of his arguments because BB&T was one of the largest banks NOT to take an Obama administration bailout. Allison is an insider who knows what he is talking about and provided very good insight as to the current state of the economy. He laid out a few main points during his speech.

Government Policy Was The Number 1 Cause Of The Financial Crisis.

Many would argue that de-regulation and greed during the Bush administration allowed the banks to do as they pleased. This in fact is not true. Allison described in the book due to regulations there were auditors of auditors pouring over data and clogging the business environment.

Allison describes that mis-regulation and the idea that housing is an investment, when in fact it is consumption was the main problem. A massive over consumption of the housing market occurred in the early 2000’s which lead us to today.

Sub-Prime loans were being made to unqualified buyers (at the direction of the Federal Reserve), who large banking institutions knew could never be afforded or handled correctly. This created an especially huge problem for smaller banks who would offer high interest rates on short term deposits. They would take the capital from these deposits and make risky loans, nearly guaranteed to fail, and use the FDIC insurance as backing. When the housing market collapsed…good bye funds.

Housing Is Consumption

The idea that housing is an investment is one many Americans share. A rental property here or condo at the beach can be great to supplement income. The problem lies when unqualified and fiscally irresponsible buyers obtain loans easily. The borrower then thinks that their house will never depreciate and “save them” if they get into trouble financially.

Construction wages correlate with those of manufacturing. Wages increased dramatically due to the housing market explosion. When the housing market collapsed so did the wages, homeowners, and jobs associated with them. The lost jobs in manufacturing were then outsourced to foreign companies with less corporate regulation and cheaper wages.

The Federal Reserve & Its Philosophical Ideas

The federal reserve during much of the housing market collapse stuck to its highly debatable policy of not allowing natural correction in the market. The reserve then went on to pass the Dodd-Frank Reform Act, whose implications are destroying the market.

The act in short allowed for the government to micro manage financial institutions right down to community banks. If the borrower does not meet critical standards he is denied a loan. This type of lending is destroying small businesses and causing banks to often go bankrupt.

Allison stated during the lecture that, “These are the worst lending standards I’ve seen since the Great Depression”

The Reserve, Allison believes is trying to force its philosophical idea of altruism upon the general public. The basis of the idea is that everyone is better than you personally as the consumer.

If John Doe has the right to a nice house, Why don’t I?

These ideas pushed by the Federal Reserve are destroying the founding ideals of America. Everyone has the right to a nice house, but you do not have the right to what others have gained or to enslave them. Each individual has the right to the production of their labor, sometimes you fail and sometimes you succeed, that is what makes The United States so unique.

Allison ended his lecture  with this, “America is the land of opportunity. You can be great, you can fail and try again, but you have the freedom to live your life” Something I think we all as Americans can take to heart.

Kyle Wiley

Kyle Wiley is a development officer at The Heritage Foundation and a graduate of the University of Georgia. Find him on Twitter: @kwiley1

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Categories: Budget and Finance, Government Transparency, Opinion
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