Understanding the 2008 Financial Crisis: Why Government Intervention Was Misguided

by | Oct 12, 2023 | Quick Reads

The 2008 financial crisis, often hailed as the most devastating economic downturn since the Great Depression, sent shockwaves throughout global economies. At its core, this crisis was an inevitable fallout of unchecked financial speculation, lax lending standards, and an inflated housing bubble that was bound to burst. But as the dust settled and banks teetered on the edge of collapse, the U.S. government’s decision to intervene and bail out these financial institutions remains a subject of contention, especially for advocates of limited government and free-market principles.

The housing bubble’s genesis can be traced back to persistently low-interest rates and lenient lending practices. Financial institutions, driven by short-term profit motives, dabbled in high-risk mortgage-backed securities (MBS) and collateralized debt obligations (CDO). When the bubble burst, these securities plummeted in value, pushing banks into a perilous situation.

Enter the U.S. government. In a hasty bid to ‘save’ the economy, the Troubled Asset Relief Program (TARP) was rolled out, aimed at buying distressed assets and equity from beleaguered banks. Additionally, institutions like Bear Stearns, Merrill Lynch, and AIG either got merged into larger entities or received hefty bailouts.

For staunch libertarians and conservative thinkers, this intervention was a clear violation of free-market principles. Here’s why:

  1. Moral Hazard: By bailing out banks that engaged in reckless financial behavior, the government inadvertently sent out a message: Risks will be socialized while profits will remain privatized. This might encourage future financial irresponsibility, knowing that the government will intervene if things go south.
  2. Distorting Market Mechanisms: In a genuinely free market, businesses that cannot sustain themselves should fail, making way for more efficient players. By artificially propping up failing banks, the government disrupted the natural selection process inherent to capitalism.
  3. Taxpayer Burden: The bailout wasn’t free. It came at the taxpayers’ expense, essentially making the general public pay for the mistakes of a few financial moguls. Is it fair for the hardworking American to bear the brunt of Wall Street’s excesses?
  4. Setting a Dangerous Precedent: If the government intervenes once, where does it draw the line? Such actions set a dangerous precedent, signaling that any future economic entity in distress could expect a safety net, regardless of its contribution to its own downfall.

The 2008 crisis, in all its complexity, offers a lesson on the delicate balance between economic freedom and responsibility. While some argue that government intervention was necessary to prevent a more significant collapse, from a libertarian standpoint, it appears to be an overreach that could have long-term consequences.

Advocates of small government and economic freedom might contend that the market, if left to its devices, would have corrected itself, albeit painfully. In the end, it’s crucial to remember that sustainable economic prosperity cannot be built on foundations of fiscal recklessness and the expectation of government bailouts.

NEXT: The Foundations of Economic Freedom For Idiots

AMP America

Get Amp’d in your inbox

Subscribe to our newsletter to get videos, articles, and more sent right to your inbox daily. 

You have Successfully Subscribed!

Share This