Economic regulation

I am loath to have an opinion about why the recent market crisis happened, as I know little about markets or crises. But it seems to me that the problem does not lie in the fact that the market was too regulated or too unregulated, but rather poorly regulated. I suspect that Richard A. Epstein seems to have gotten it right. In his defense of libertarianism, he suggests something like this (and I may be getting this very wrong): when government subsidizes some loans and guarantees others, who wouldn't want to be a lender or own such a loan? The return is almost guaranteed. And as the law of supply and demand has it, when everyone can now afford to borrow money for homes, the prices will go up. But this is not sustainable for long. How high can prices go, and how many subsidies can be issued? And how long can people live beyond their means? So too many people start defaulting on their loans, the price drops for everyone, and now homes that were bought on the assumption that there was a high demand (and so at a high price) are now worth less because there is now a lower demand. And since the people who buy and sell things like loans are able to spread this risk throughout the system in diversified portfolios, when the mortgage market went bad, lots of portfolios started faltering. When lots of portfolios dip, everyone is scared and pulls their money out of the market. The rest is familiar. Less money in the market, the less business have to work with, and thus the poorer our country and hence investors, become. (How the libertarians get blamed for a problem the government started is beyond me.)

But anyway, it seems to me that the government is not doing a bad job regulating the credit markets, but rather it was undermining the credit markets when it found a way to artificially increase the price of houses temporarily, by making the money used to buy them cheaper and easier to get. So people who could afford less were buying more, and it didn't dawn on too many people that this can only hold up so long because the government seemed to be keeping the money cheap.

Look, we have all had to make sacrifices to get what we want. Modernity generally implies finding ways to do more with fewer sacrifices. The government seemed to think it found a route to home ownership without the sacrifice. It didn't. The government's plan needs work. I hope that we learned a valuable lesson in what sorts of economic policies do not work, so maybe we can get it right next time.