the financial crisis and the free market cure - john allision

[...]... Furthermore, a free society is essential if any individual is to achieve personal self-fulfillment and true happiness 1 Fundamental Themes THERE ARE SIX FUNDAMENTAL THEMES THAT REFLECT THE BASIC causes, consequences, and cures of the financial crisis and the ensuing Great Recession These themes outline the essential ideas that must be understood and that will be discussed in detail in the following... to a start-up bank for 0.25 percent more in interest without FDIC deposit insurance? Of course not The secondary impact of these high-risk-taking banks is equally significant They poison the market for other banks by degrading the risk standards of all the financial institutions in the market Being a relative newcomer to the Atlanta market and having a community bank focus on lending to the residential... for power, the desire to control others, and the belief that you are smarter than the people you are going to “save.” Chapters 21 through 25 are the most important in the book because they deal with the philosophical issues However, the preceding chapters make concrete the effect of the philosophical ideas expressed in these chapters and therefore are very helpful to an understanding of these concepts... impact on the quality of your life and that of your children The vast majority of the explanations for the crisis and the ensuing recession presented in the popular press are not true Destructive policy decisions are being made based on this misidentification of the causes of our financial problems If you misidentify the causes, you will, of necessity, propose the wrong cures The Great Recession and the. .. leveraged the capital by paying abovemarket rates on CDs, and then used the capital to make risky motel loans The FDIC lost almost 50 cents on the dollar Of course, the loss was paid for by healthy banks (including BB&T) through the increased cost of deposit insurance The vast majority of these start-up banks would not exist in a free market They exist only because of a massive subsidy (relative to their... Often the plan is to run the bank for a few years and then sell it to another regional bank The local investors put in a small amount of capital, and the bank is able to leverage this capital quickly by paying above -market interest rates for certificates of deposits The bank then makes high-risk loans, often to friends, family members, and business associates of its board members and investors The new... inspections, and other actions In the last several years, monetary highway bridges have been falling down all over the place The Federal Reserve owns and controls the monetary system in the United States The Federal Reserve is theoretically an independent government agency However, the president appoints the members of the Federal Reserve Board with the approval of Congress While some members of the board... steps in and uses monetary policy to stop the downside correction process, all it achieves is to defer problems to the future and make them worse Its action delays and distorts the natural market correction process, thereby reducing the long-term productivity of the economic system by encouraging a misuse of capital and labor One of the best ways to view free markets is as a great number of experiments... inverted yield curve) Free markets represent the insights of millions of market participants, who get to vote based on their past successes (how much wealth they have earned) This does not make markets always right, but it dramatically improves the odds The free- market economist and Nobel laureate Friedrich Hayek highlighted a concept that he termed fatal conceit This is the belief on the part of elitist... finance the bubble The fundamental cause of the financial crisis is mistakes by the Federal Reserve—a governmental entity Figure 3-1 shows the interest rates driven by Federal Reserve policy: the fed funds rate, the prime rate, and the 10-year bond rate from 1990 to 2008 Focusing on the period from 1998 to 2008, let me share with you an important observation During this period, I met periodically with other . without the prior written permission of the publisher. ISBN: 97 8-0 -0 7-1 8067 8-7 MHID: 0-0 7-1 8067 8-4 The material in this eBook also appears in the print version of this title: ISBN: 97 8-0 -0 7-1 8067 7-0 , MHID:. Financial Crisis and the Free Market Cure: Why Pure Capitalism Is the World Economy’s Only Hope is more than extraordinary. His explanation of the financial collapse rests on a values-rich, free- market. on the free market and today’s financial crisis must be someone with real- world experience, maturity, and the ability to offer the best solutions. John Allison is that author, and this is the