TheDC: Who do you think should be blamed for the financial meltdown? Fat-cat bankers, irresponsible borrowers, government?
TS: I would say all of the above. The question is, how much? If you are asking what drove it, it originated in the idea that the government could make housing “more affordable” by intervening in the market. All the evidence….shows that housing has been far more affordable where there has been the least government intervention. It has been most unaffordable in places where the government comes in very heavily, as in coastal California and preeminently San Francisco.
In the process of trying to make housing more affordable, they lean on lenders to lower the standards for lending to people and that really is the crucial factor. Without that, the rest of the crisis wouldn’t have happened. Other people made their mistakes that added to it, but the crucial mistake was the government forcing the lending institutions to lower their lending standards. And of course when you lower the lending standards people default.
TheDC: There is an argument on the left that says in order to overcome an economic crisis, the government must spend more. Is this the case? How should we rehabilitate the economy?
TS: We shouldn’t be rehabilitating the economy, we should be leaving the economy alone. History shows it rehabilitates itself much faster than when the politicians intervene. Most people are unaware that for more than a century after the founding of this country, the federal government did not consider it its job to intervene when there was a downturn in the economy. Those downturns ended much faster than the downturns where the government intervened.