John Allison gives a uniquely from-the-inside look at the recent financial crisis and shows that the cause was government manipulation of the economy, which provided strong incentives for irrational behavior, coupled with government regulation, which obstructed rational thought and action.
Examples pile up: the Federal Reserve caused a housing bubble through artificially low interest rates; Fannie Mae and Freddy Mac drove Savings and Loan Associations out of the mortgage market then made massive quantities of loans to people who could not afford them and which could never be repaid; the SEC forced banks to shrink their reserves against bad loans; FDIC insurance and the Fed’s low interest rates lulled depositors and investors alike into neglecting the soundness of banks; government-sanctioned rating agencies inflated the grades of mortgage-backed securities; erratic bailouts of crony-favored institutions like Countrywide, Washington Mutual, General Motors, and General Electric destroyed the rule of law and drove the panic deeper.
But Allison does more than identify that the root financial cause of the crash was government intervention in the economy. He names the political ideas and specific steps necessary to effect a cure: full laissez-faire capitalism, starting with deregulation, disengagement, and sound money.
Allison then — in what are my favorite chapters in the book — describes the moral values and virtues that each of us can practice to make our lives rational, productive, confident, and happy.
The Financial Crisis and the Free Market Cure is a diagnosis and prescription for moving off the road to ruin and back to the vision America was founded on, a path of prosperity and personal happiness.