Ever since the Lehman Brothers went bankrupt in 2008, many people assumed that the housing market crisis occurred because the state surrendered its control of finance to the market. A source of dodgy and high risk loans is the actual cause as to why the Lehman Brothers firm went bankrupt. Due to the consequences of the 2007-2008 housing market crisis, plans are set afoot to set up a permanent public backstop to the mortgage market. The government would insure 90% of loses if there were to be another crisis. Although this may sound like a good idea, there are two issues. The first is that it is hard to see how entrenching state support will prevent excessive risk taking. The second issue is that the 07-08 housing crisis did not occur because of a lack of government intervention. The housing market is far from a free market, as it is one of the most regulated industries in the world.
Back in 1856, economic journalist Walter Bagehot blamed market crashes on what he called "blind capital". These were periods when people were credulous with their cash, they ignored risks and flooded unwise investments. As a result of previous market crashes the government had to devise some special rules and regulations to make finance safer. Bagehot invented one rule, that being the need for central banks to rescue other banks during crises. A sort of toughness rested on the view that governments should treat financiers like any other industry, thus forcing bankers and investors to take as much risk as possible for themselves. The more the state protected to the system, the more likely that people would take risk without feeling they are liable.
That exact danger was bounteously illustrated in 2007-2008. Having pocketed gains from state underwritten risk-taking during the boom years, bankers presented a bill to tax payers when the market bubble popped. Since 2008, there have been a mass of new rules, ranging from America's unwieldy Dodd-Frank law to other transaction taxes in Europe. Some steps have been taken to boost banks capital and liquidity in attempt to make finance more self reliant. Also, banks in America now face a tough new leverage ratio. However, many people still believe that the urge to regulate and protect leaves an industry to depends too much on state support.
http://www.economist.com/news/leaders/21600699-state-subsidies-and-guarantees-are-once-again-corroding-financial-sector-and-creating-new
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