Cato and the Financial Crisis


A libertarian friend recommended as “great” this missive from Cato President Ed Crane making the case that if only we’d listened to the libertarians none of this financial crisis business would have happened. The analysis is pretty damn weak if you ask me. Crane writes:

As for the subprime crisis, it was not just Peter Wallison sounding the alarm. In 1997 Cato published a Policy Analysis by Vern McKinley entitled “The Mounting Case for Privatizing Fannie Mae and Freddie Mac.” Vern wrote: “Because of their quasi-government status, there is a market perception that Fannie Mae and Freddie Mac mortgage-backed securities and debt carry and implicit federal guarantee against default. Hence, the GSEs expose the federal taxpayer to an ever-increasing potential contingent liability that could ultimately cost tens of billions of dollars to rectify.”

I think that analysis is perfectly correct, but the fact of the matter remains that it has almost nothing to do with our present situation. The implicit government guarantee to Fannie and Freddie was a bad idea in my view, but it had nothing in particular to do with the creation of the financial crisis, and the upshot of the crisis ultimately was that even institutions that hadn’t been given such guarantees wound up getting bailed out.

But more to the point, when the best your organization can claim in terms of prescience is that you published something in 1997 then you know you have a problem. Clearly, the McKinley pieces doesn’t have much of anything to say that’s relevant to the specifics of the problems that have unfolded in 2007 and 2008. That’s not McKinley’s fault, it’s a reflection of the fact that he was writing in 1997, before the stock market crash and the subsequent growth of the housing bubble. 1997 was too early to be prescient. Meanwhile, Cato does have a section on its website dedicated to papers on the subject of “Financial Crises and the Global Financial System.” They published no papers whatsoever between September 2004 and May 2008. And the September 2004 paper was about Iraq. 2004 also saw a paper about the Dominican Republic. 2003 witnessed another paper about Iraq and an Anna Schwarz paper on “The IMF’s Dubious Proposal for a Universal Bankruptcy Law for Sovereign Debtors”. But as the stage was being set for the current crisis, absolutely nothing.

Similarly, on housing markets they published absolutely nothing between 2004 and 2008 — precisely the years during which the bubble was growing and changes in policy might have made a difference.

In January of 2005, though, Cato’s Alan Reynolds did publish some sneering nonsense deriding those who believed there was a housing bubble:

The start of each year is prime time for economic pessimists, who try to persuade us terrible things are about to happen. A perennial favorite is the “housing bubble” about to burst, with a supposedly devastating impact on household wealth. […] A July 2, 2002, Wall Street Journal editorial on this topic worried that “homebuyers are resorting to greater levels of mortgage debt.” Contrary to such anxieties about homeowners being over-leveraged, their equity exceeds 56 percent of the value of homes and that ratio has not declined. Mortgage payments often replaced rental payments as homeownership increased, but that was not an added burden. […] House prices did not just “bubble” for no reason.

I don’t know what conclusions about “libertarians” should really be drawn from any of this, but it’s clear enough that Crane’s institution was mostly indifferent to the problem as it mounted, and occasionally intervened to try to shout down people who were calling attention to the issues.