Money and the Present Crisis
Gerald P. O’Driscoll Jr.
We remain in an economic crisis and financial crisis, one that Gary
Gorton has named “The Panic of 2007” (Gorton 2008). The thesis of
this article is that monetary policy has played a pivotal role. Under
Alan Greenspan and now Ben Bernanke, the Fed has conducted
monetary policy so as to foster moral hazard among investors,
notably in housing (O’Driscoll 2008a). More generally, the crisis is
the product of a “perfect storm” of misguided policy. Policies to
encourage affordable housing fostered the growth of subprime lend-
ing and complex financial products to finance that lending.
Regardless of the desirability of the social goal, the financial super-
structure depended on housing prices never falling. Housing prices
do fall sometimes, and did so decisively beginning in 2007 (Gorton
It is largely a myth that unregulated financial capitalism failed and
new regulation is needed. Aside from health care, financial services
is the most heavily regulated industry in the economy. No part of it
completely escaped regulation and most parts were heavily regulat-
ed, typically with multiple government agencies overseeing the activ-
ities of financial services firms.
The last legislative deregulation occurred in 1999 during the
Clinton administration. The most significant change it wrought was
to permit commercial and investment banks to combine into univer-
sal banks. (In reality, the statute legalized and regularized activities
Cato Journal, Vol. 29, No. 1 (Winter 2009). Copyright © Cato Institute. All rights
Gerald P. O’Driscoll Jr. is a Senior Fellow at the Cato Institute. An earlier ver-
sion of this paper was also presented at the annual meetings of the Southern
Economic Association, Washington, D.C., November 21, 2008. The comments of
Christopher Coyne, Roger W. Garrison, Lee Hoskins, William T. Long, Maralene
Martin, and Stephen Shmanske are gratefully acknowledged.
already in place.) All such entities (e.g., Citigroup and JPMorgan