September/October 2009

Setting the Record Straight

Johan Norberg tells the story of the financial crisis

What exactly happened?” Johan Norberg, author of In Defense of Global Capitalism, asks in his new book on the recent financial crisis. “How could overenthusiastic home buyers in the United States sink the global economy?” Banks collapsed and thousands of Americans lost their homes. Two of the “big three” auto makers are reduced to beggars and wards of the federal government. Pundits and politicians attach blame to myriad actors, from the Federal Reserve to greed on Wall Street, from a Congress desperate to increase home ownership to reckless financial innovations. Understanding how we arrived at this recession means walking through a maze of regulation and deregulation, capitalism and corporatism. The task is daunting.

But with Financial Fiasco: How America’s Infatuation with Home Ownership and Easy Money Created the Economic Crisis, Norberg acts as an articulate and insightful guide. In six short chapters, he tells the story of the crisis. The first three address monetary policy, housing policy, and financial innovations — the key components that combine, a chapter later, to create financial catastrophe. The final two chapters describe the government’s mismanagement of the crisis and how we are repeating some of the very mistakes that caused it. Norberg calls his book a detective story and, as he carefully traces the clues, the causes of the crisis become clear. Understanding those causes is crucial for every American who has felt the recession’s effects — and an understanding is exactly what Financial Fiasco provides.

It was government intervention, not laissez-faire capitalism, that created the recession. But that’s not what the folks in Washington would have us believe. From the earliest days of the recession, “politicians who had never hesitated to claim credit for each one-tenth of one percentage point of growth or for each new job created … immediately went to great pains to pin the blame for the downturn on their lack of influence.”

How does reality differ from the fantasies of politicians and pundits? “The story of this storm in the global markets is the story of how government intervention to solve previous crises laid the foundation for a new one,” Norberg argues. He shows how housing policy — a desire by politicians to help more of us realize the American dream of home ownership — encouraged private sector financial innovations, innovations that misrepresented risk and, eventually, lead to the crisis. And it was the poor management of this crisis by federal regulators that exacerbated the recession.

Norberg ends the book with a warning. “After government authorities had helped create the worst financial crisis in generations,” he writes, “the climate of ideas has now shifted dramatically in the direction of bigger and more active government.” Financial Fiasco sets those ideas on their proper course and shows how liberty, not greater government control, is the true path to recovery.