However the majority of the recent problems have been due to regulation and distortion of incentives, some by the government(s) and some by the economic participants. Here are just a few things:

***
Credit ratings. If credit ratings had not been tightly held by uncompetitive forces then all the ridiculous credit issued may never have happened. Instead rubbish was lapped up on the false and institutionalised belief in such ratings.

Anybody with a few braincells could tell you that a bond yeild 200+ bps above swap is not AAA rated. Yet this is what was happening. The very fact that it was yielding well above swap indicates that many people out there weren’t falling for the sham.

Big players merely following the regulatory requirements of AAA and the naive fell for the trick.

***
Poor incentive structure. Company incentive structures for employees rarely in line with company objectives. Investment bank employees have done a VERY good job of maximising their own returns, however this has often been at the expensive of long term company returns.

***
Too loose montary policy.

More realistically, that which may be perfectly rational for every particular firm can also be perfectly irrational for the system as a whole.

Taking government to be soley responsible for market inefficiencies is little different than blaming this or that ’shock’; both methods, most often unconsciously, attempt to absolve the capital system of its internal contradictions by shifting ‘causality’ to a thought to be exogenous terrain.

I’m now confused because my perception of most free-marketers was to minimize any government involvement, even in its capacity of being market’s referee. You no longer sound like a strident free market conformist.

BTW my perception is that the current collapse in the credit markets, was mainly triggered by the real estate bubble, which was enabled, more than anything else, by the misrepresentations of the actual credit risk imbedded in the products and entities (CDO’s, SIV’s)promoted by the purveyors of the structured financial instruments. Then it was further exacerbated by the lack of oversight in the OTC markets for the huge volume of credit default swap insurance that was bought and sold, over the past few years. Bottom line, it was not government action, but rather inaction, that swelled this crisis to its current historic proportions.

The exceptions are rare.
New Zealand under finance minister Roger Douglas (late 1980s) is a virtuous example. Three years of low-tax, low-regulation, no-subsidy, free-market policies set that a failed economy on a path to success. Sadly, 15 years of dead-hand government interventist socialism has since prevailed. But the benefits of even a few years of free-market policies are still being felt there. What a shame it is still a rare example in the world.

There are examples of short periods of free banking which, unfortunately, were not long before being stamped out by governments who wanted to reassert or maintain their control of the money supply.

The period in the US leading up to the civil war was relatively close to an era of free banking. It was also a period of extremely fast growth, with minor disruptions as banks would occasionally fail. This is opposed to the current system, where bank failures are rare, but when the failures do occur, they are large, and systemic. This crisis has yet to fully play out, but it is becoming clear that this crisis is far too big for the FDIC to handle, and most likely, the Federal Reserve to handle.

http://uweb.superlink.net/~neptune/BankFAQ.html

There are also examples of private monies supplanting established government currencies. I haven’t had the opportunity to read this book yet, but it looks quite good.

http://www.mises.org/store/Good-Money-P519.aspx

Unfortunately, strong theoretical support for free banking wasn’t available until the era of statism that has marked the 20th century. Hopefully it will get its chance, sooner rather than later.

http://en.wikipedia.org/wiki/Face_plant

rather than one of these

http://www.merriam-webster.com/dictionary/face-plant

No, no, no. The sellers deliberately and willfully ignored the risk. Contenting themselves with the happy lie that “securitization strips out the risk” in assets. Enron claimed the same thing during their heyday. Truth is securitization adds little to no value for the buyer while created huge moral hazard for the seller.

Of course if securitization isn’t as valuable as propoents claim then all those finance grads will have to find productive work for a change.

1) Government monopolies granted to the ratings agencies. Who came up with the bright idea that the people spewing this toxic crap should be paying for their own ratings? Ambac and MBIA were able to tell Fitch to stop rating them and removed access to their internal books.

2) Fannie and Freddie, paragons of the ‘compromise’ between free markets and government intervention are shown for the fraud that they are. They ENABLED the broker dealer business model of originate and distribute. They were able to ’spread risk’ across vast swaths of mortgages, ship it to fannie or freddie, or even MBIA or Ambac, who both were given AAA ratings by the government sponsored rating agency monopoly, and then any products they spewed forth were given AAA ratings by those same monopolies. This was all to ‘grease’ the mortgage market wheels and make housing ‘affordable’.

3) The ‘Greenspan/Bernanke Put’ has been in place for over a decade now, allowing moral hazard to run rampant as even hedge funds like LTCM were ‘too big to fail’. I was just reading a book from a decade ago which pointed out that the US would never reach the sort of leverage that Japan had prior to their Lost Decade because companies in the US knew they wouldn’t get bailed out by the government. Well thank you Greenspan, thank you Bernanke, for the wonderful brew of moral hazard that has caused the insane amounts of debt and leverage to be built into the system.

4) How about the FHLB, who has ‘loaned’ Countrywide $50B+? What about the SBA, which has ignored fraud in it’s lending arms for years? What about our federal government, which has been the poster child for creating ‘off balance sheet’ liabilities and leveraging up its debt load?

As far as ‘efficient’ markets go, no, markets will never be perfect. They can be effective though, which is the goal.

And the idea of a ‘mixed’ economy is laughable at best. Go read your Hayek and Mises. Interventionism begets more interventionism. The common refrain now being spouted out is that free marketeers are ‘ideologues’. Why don’t you attack the ideas instead of throwing up abstractions? Markets will make mistakes because the actors within the market are humans. The mistake is assuming the government intervention will somehow solve those problems. Who comes up with the policies that government enacts? Yeah, that’s right, humans, so your ’solution’ is circular. Humans in government are just as likely, if not more so, to enact policies that are mistaken.