Financial Crisis Explained: Study Finds Crony Big Governments Create Crisis, Not Limited Governments

The financial crisis explained in terms of reckless limited government policies, as Democrats were allowed to do in 2008 and 2012, is factually untrue. Big government cronies cause financial crisis.

The last 40 years has been the most financial crisis-prone period in banking history, according to a new study released by AEI. Paul Kupiec of the American Enterprise Institute looked at the history and structures of banking systems in Canada and the US, and found that big government creates financial crisis, not deregulation per se and other limited government policies.

In fact, it is big government doing what is in big government’s crony interest that spurs the conditions ripe for financial crisis.

Charles Calomiris, author of the new book, Fragile by Design: The Political Origins of Banking Crises and Scarce Credit, detailed how political groups captured economic benefits and weakened the U.S. banking system, while Canada’s constitutional structure blocked such bargains and produced a stable, competitive banking system.

Calomiris found only six countries who both retained abundant credit and remained crisis free. And the conditions in these states were unfavorable to big government, at least regarding banking industries.

During an event in Feb., the findings of this study and Calomiris’ new book were presented at an event in Washington D.C., and can be viewed in the video above. However, the entire study is below for your reading pleasure.

The biggest mistake the Republican Party made was to allow the Democrats to set a narrative involving the financial crisis, explaining the cause in terms government failing to protect Americans and Republican tax policy favoring the rich. In reality, government not only fails to protect Americans’ interest, but its own interest is in direct contrast to Main Street Americans. The bottom line is that when government directs bank credit, as it did with Fannie and Freddie and continues to do with the FHA, with the explicit purpose of buying voters’ allegiance, then the economy suffers and crisis is created.

I have argued in Our Virtuous Republic: The Forgotten Clause in the American Social Contract, which also examines law and financial policy throughout American history, government not only is responsible for creating crisis, but does so intentionally. James Madison said that “crisis is the rallying cry of the tyrant,” a sound we have forgotten much to the detriment of our freedom and economic prosperity.

Key Points & Findings:

• Without proper checks and balances, governments invariably choose to use their financial systems to carry out social and political goals, often financed through private banks, off the government budget.

• This practice can push resources out of the financial sector, reducing business and consumer access to credit and limiting economic growth.

• Eventually, government-directed lending programs end up costing taxpayers dearly, as loans made to satisfy political goals rarely make economic sense without an explicit government subsidy somewhere in their life cycle.

• Armed with new authorities from the Dodd-Frank Act, and fortified by public hostility toward bankers, US bank regulators are increasingly using their new powers to direct lending.