In times like these, you really have to wonder what the Small Government crowd - libertarians, tea partiers, Norquistians, most of the GOP (nominally) - would like to see happen in reaction to an economic crisis like the one facing the planet in the fall of 2008. Judging from their antics over the last year or so, they would react the same way they react to most everything - by complaining about the size of government, about government interference in their lives, and by calling for more tax cuts. Never mind that most of these people, the middle-class ones at least, would likely not survive for long were they to be delivered a government the size they say they want - "small anough to drown in the bathtub." In anarchy, e.g. fully unfettered capitalism, only the strongest/wealthiest get to lead anything like a civilized human life.
What exactly would they have done back in September 2008? The housing bubble had burst and our system of finance was about to do the same. Would they have chosen to let market forces run their course, which is to say, do nothing? The free market is, after all, their panacea. Would they have done nothing in spite of the fact that doing nothing, in terms of government regulation, is what enabled the house of cards to grow so large that it had to come tumbling down sooner or later?
Would the SG folks knowingly, explicitly refuse to regulate the financial dealings involving collateralized debt obligations (CDO) and credit default swaps (CDS), as Alan Greenspan and the rest of the Bush administration did? Would they say in the aftermath, as Greenspan did, that they just couldn't believe that the CDO and CDS financiers wouldn't regulate themselves? One suspects the answer to those questions is Yes. Greenspan is a committed objectivist, the ultimate small government, laissez-faire, deregulation advocate.
What would they say about the agencies, like Moody's, that gave investment-grade ratings to CDOs backed largely by sub-prime mortgages - let the buyer beware?
When it comes to the pernicious effects of deregulation, Bush apologists like to claim that it was relaxed mortgage lending rules during the Clinton presidency (with Republican control of Congress) that led to the enormous growth in sub-prime mortgages, and that it was the high rate of default in that market that caused the economic crisis. This blame is wholly misplaced. Sub-prime mortgages by definition have a built-in safeguard against default. Their higher risk is offset by their higher interest rate. There was always going to be some pain in certain sectors if a lot of them went into default, but in and of itself, the sub-prime market could never have caused a crisis of the magnitude of dozens of trillions of dollars such as we faced late in 2008, and continue to face today - roughly the global annual GDP, that's the magnitude.
How did this come to pass? The names of some of the players have in recent months come to light. Why were companies like AIG and Goldman Sachs allowed to make such outrageous financial deals that when things broke Goldman's way and against AIG, the latter had to be rescued by the Federal government or face liquidation?
Now what Goldman did was insure through AIG the tranched, securitized CDOs they had sold and did not own! They knew the securities well enough, it seems, to know they had a big downside risk, though not for Goldman. By buying CDS contracts on them from AIG, they effectively bet and bet big that those CDOs would default, and since they did not own them they stood to profit hugely if they did default.
And profit they did, when the Feds stepped in and rescued AIG with taxpayer money. Goldman was paid 100% of the face value of the CDS contracts they had bought from AIG, even though they were not at risk in the default of the insured debt. This obviously was a huge error. AIG had to be saved, in a sense - the risks they had assumed through CDS and non-CDS insurance contracts could not simply be abandoned - but there was no reason Goldman had to be paid in full, when the only risk they had incurred was the "premiums" they had paid AIG for CDS coverage.
Oh, what a tangled web ... there was no oversight, no regulation of CDO and CDS buying and selling, even though unthinkably vast liabilities, for the taxpayers ultimately, were generated in the process. In a free, unfettered market, the level of irresponsibility was tremendous, unfathomable, and enormous sums of money were made by a few people at the expense of all the rest of us. It was not a case of private fortunes being won or lost.
To sit back and watch all of this play out to its natural conclusion would have been equally irresponsible, and ultimately disastrous. With no intervention, no financial rescue, no mortgage relief, no stimulus program to get money flowing in the economy again, it is clear that conditions would have gotten far worse, and that we would still be in decline instead of recovery. Mistakes were made, to be sure, especially while Bush was still "in charge," but to have done nothing would have been nothing short of inhuman.
So now we have the Tea Party folks, with their for profit (of course) convention, behaving as if none of what I have described above ever happened. They have got to be the most selfish and myopic individuals in the solar system.