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The Corporate State Fails
According to popular myth, the current financial turmoil is the result of Bush administration deregulation. One problem with that theory: there was no deregulation. The last banking deregulation, the Gramm-Leach-Bliley bill, was signed by President Bill Clinton in 1999. Oops.

Gramm-Leach-Bliley undid the New Deal-era Glass-Steagall Act, which — for no good reason — separated commercial banking from investment banking. The act was finally scrapped because the artificial separation of banking functions prevented diversification and made American banks vulnerable to full-service foreign competition. Repeal of Glass-Steagall doesn’t mean banks have not been subject to myriad regulations by the federal and state governments. Besides, Glass-Steagall has nothing to do with today’s troubles.

So the turmoil is not the spawn of deregulation. What then? We distinguish between regulation and intervention. It is possible for the government to abstain from regulating while still intervening ruinously in markets.

For example — and this is at the root of the current problems — the government can subsidize, underwrite, or even require foolish lending practices that the free market would prevent or punish. Such a program is every bit as interventionist as restrictive regulation is because it keeps the market process from working properly. The financial debacle can be fully accounted for by the government’s decades-long campaign to enable people to buy more housing than they can afford and then to underwrite the mortgages through its creations Fannie Mae and Freddie Mac, i.e., the taxpayers.

To put it in the simplest terms: Republican and Democratic governments deliberately shifted the risk of dubious mortgage-writing from lenders and borrowers to the public...