What Caused the '08 Financial Crisis: Free Markets or Government?

Was the 2008 financial crisis caused by market distortions or market failure? Former CEO of BB&T Bank John Allison debates Moody's economist Mark Zandi.
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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.

Produced by Todd Krainin.

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

[chadjones]

How can this even be a debate so long as the "secondary" housing market is even a thing? The fact that banks could make long-term loans, take short-term profit and then offload the long-term risk onto a government-sponsored "secondary" market should be the end of discussion.

[LibertarianRF]

It's very simple. If interest rates were set by the market the vast majority of the silly childish ninja loans would have never happened etc. It's 5th grade thinking.

[DiogoVKersting]

To me the main point is not really why did it happen, by why the "bad actors" didn't suffer any consequences.
If there's one concept I'd like everyone to know about crises is that of Moral Hazard. Basically, while people that make the bed don't have to lie on it, the mistakes (not a mistake in their point of view) are going to keep happening.

[lesterliby]

Easy to say.Keep goverment out of it. If you cannot afford a student loan do not borrow with the taxpayers money. Sounds like every one except Mr.Allison is supporting government regs.If the regs don’t work, they then want to pass new regs! The banking industry is probably is the most regulated. Thank you Mr.Allison! It is a moral issue. Altruism vs Individual Rights

[trandom]

I dont learn anything from these debates because the Fed sympathizers 'arguement' is always the same uninformative avoidance: "Your wrong". Care to state why? " Im smarted than you because I wrote a book". Can you share a fact, proposed cause of the problem or proposed solution to the problem from your book? " Its complicated" Makes me conclude critical thinking was not part of the process for arriving at their chosen view. I do appreciate the civility & intention of both sides however.

[aredt]

Wow a lending business grew during the recession I wonder why?

[chubbyninja]

SUMMARY: Allison clearly demonstrates that government policy, for many years, built this bubble by encouraging (often REQUIRING) increasingly risky and bad behavior on the part of the private sector. Zandi then zooms in on the final couple of years before the crash and says "Look! The private sector is acting badly! That's why there was a crash!" and never acknowledges any of the government interference in the market that forced those in the private sector into bad behavior in the first place.

[princeabassi]

We really need to abolish the Federal Reserve.

[g]

Please watch the Politicon debate between Ben Shapiro and TYT' Cenk Uygur, a socialost progressive. In that debate, Uygur describes a system in which you had socialism for the rich. If you agree that this is how the system worked, then you would have to agree that free markets were not responsible for the crash. In a free market, no reasonable lender would knowingly provide a loan to someone who has no capacity to repay. The risk of default was borne not by the lender, but by the govt.

[LibertarianRants]

It seems like Mark has a good grasp on how all the actors behaved, but seems to significantly downplay how much the government set the stage for all of it to occur.

[myskullisred]

20:43 And tell us, Mark, is the rating agency market free and open or is it a government-granted oligarchy that stifles rating competition?

[joshbrackelsberg]

The card carrying member blaming the markets, not the government is just a big fat liar imho for what it's worth.

[joshfischer]

John Allison: I was there with boots on the ground for 20 years, I witnessed the whole thing, and here is what happened.
Mark Zandi: I made a chart.

[Rovers]

It was really an aftereffect of the Finno-Korean Hyperwar.

[homewall]

Lack of oversight was coupled with guarantees of a bailout, which all proved to be true. Like high tuition and high medical costs, the more government "helps" lenders (or borrowers as they pretend to help, but the lenders make all the real money), the more markets are distorted.

[jimlovesgina]

Seems absurd to call it a free market. It is anything but.

[ubergenie]

Many comments below focus on how simply the blame can be set. Like eager prosecutors armed with 10% of the facts they reduce counter-arguments to mere strawmen which of course are easier to knock down than the real counter-arguments. Enough of the intellectual and emotionally immature rhetoric.

Why did Fannie and Freddie take on such enormous risk in the mid-90s? They were extremely conservative with their portfolio of investments until then.

William Jefferson Clinton in 1994 announced that he would defund these secondary market programs if they didn't start taking class c and d credit loans in their portfolio. Partial and no doc loans appeared almost instantaneously. A friend who had mortgage operations in 22 states focused on C and D credit walked me through the legislation that kicked his business off and he had high praise for the government of Bill Clinton and later George Bush for continuing the government handout.

What happens when you force risk into any business run by humans? They derisk ASAP. As Fannie and Freddie issued mortgage-backed securities and sold them with false high ratings thanks to Moody's, Standard and Poor's, Fitch who took exorbitant fees to misrepresent C rated bonds as AAA, or AA. Reinsurers were brought in to transfer risk on portions of the portfolio, the reinsurers laid off their risk to a new product called credit default swaps, like other contracts (e.g. Commodities) these CDS were in turn traded as credit default options over the counter.

In 97 or 98 JP Morgan Chase created the first CRedit default swap (CDS). Sales of this type of derivative were $45million worldwide that year. By 2008 conservative accounts of CDS/CDO were valued at $25 trillion, that's right TRILLION and some accounts suggest the real number was $45 Trillion or the entire value of every company traded on every exchange in NYC!

Bill Clinton and later George Bush got what they wanted, upticks in popularity. The secondary market was forced to scramble to get rid of the risk. Imagine the initial cause as a huge earthquake occurring deep in the ocean. The wave takes time to build, and is not noticed by most until it hits land.

We do need guardrails against certain banking practices. But whether it be the SNL scandal of the early 1990s or 2008 real estate market collapse, the federal government seems to do 100 times damage then private enterprise run amuck. The federal government needs 100 times more restraint of even if its actions, albeit them well-intended (on its face).

The Federal government seems to always use citizens' money to bail out bad businesses. The banks in all cases should have been allowed to fail.

The car companies as well.

But the seismic cause of the 2007/2008 financial tsunami was Clinton's homes for all program and Bush's continuation of same.

[bachemohandes]

And guess what? To offset that bubble they made more bubbles with the exact same policies. That's just kicking the can down the road. The system is totally broken.

[IWLDELJ]

Mr. John basically won that shit immediately after he introduced himself and noted that the bank he was running never had a down turn through the entire crisis. Just MIGHT know what he's talking about.

[shosugino]

One hour and 20 minutes. I'll condense it to two words: Dodd-Frank.