Whenever there are crises in markets, socialists are quick to label them as failures of capitalism and free markets. While markets surely do, on occasion, fail, freeze-up, or get clogged (although they are far more effective than planned economies), in this case you need look no further than the role of government regulation and control to see the seeds of the problem:
Rep. Barney Frank: I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing. . . .
Yes, Congress asked Fannie and Freddie to roll the dice, and they did so while making a pretty penny for themselves. As Kimball put it today:
... in recent years the “invisible hand” that adjudicates among competing interests to produce the most efficient channels of economic growth has increasingly been replaced by the heavy hand of government-sponsored social engineering. One especially onerous one is in the form of the Community Reinvestment Act, which, in its fully-developed, post-1995 form, was a gigantic wrench tossed into the engine of capitalism that stymied the orderly evaluation and pricing of risk. It’s one thing to give Chris Dodd or Barack Obama a sweetheart mortgage for favors rendered. It’s quite another to force banks to issue more than $1 trillion of risky mortgages to people with bad, or no, credit history and then prop them up with taxpayer guarantees through the agency of entities like Fannie Mae and Freddy Mac.
Banks didn't want to own all these loans so they packaged them in creative ways and sold them like bonds to willing buyers (albeit with possibly erroneous triple-A ratings). You can call that "greed" or you can call that smart. But when the market for these packages disappeared because the housing bubble burst, the owners of the packages were forced under the new laws to mark to market - and there was no market. It's as if you tried to sell your house today for $500,000., but nobody gave you an offer today, so overnight your net worth (and your ability to get credit) dropped by $500,000.
Anyway, now banks are hoarding cash to meet their capital needs and to avoid further risk. That is why we will begin to see funds fail, and maybe more institutions fail, unless the Feds do more than their rescue bill to loosen up credit.
Malone put it this way:
Marxists and statists of all stripes are, as one might expect, rubbing their hands in glee and declaring this the final death crisis of Capitalism. But I think just the opposite is occurring. What we are in fact seeing are the final death throes of governmental social engineering. As I noted two weeks ago, we are in a kind of Mentos-in-coke world right now - where, thanks to tech, the sheer speed of transactions and the enormous breadth of response, almost any outside influence can quickly turn the whole economy (or culture) into an explosive brew.