Moral Hazard in the Policy Response to the 2008 Financial Market Meltdown

TLDR: The Cato Institute is the ideal place to draw lessons from the subprime crisis as mentioned in this paper, where the authors focus on the interaction of public policies with free markets and limited government, and the role of the public policy framework for dealing with institutional failure in financial markets.

Abstract: The Cato Institute is the ideal place to draw lessons from the subprime crisis. The organization’s mission focuses on the interaction of public policies with free markets and limited government. Even the most ardent believer in free markets must fully understand that individual liberty implies neither the nonexistence nor the indifference of government to economic affairs. Individuals live in freedom and peace when public policies are crafted in accordance with wellestablished rules and implemented with an eye toward effectiveness, not expansion. In the halls of government, we need sobriety and vigilance rather than apathy or empire building. The playing out of the subprime crisis has revealed a weakness in our public policy framework for dealing with institutional failure in financial markets that invites a continued expansion of government into areas that should be the domain of private citizens and institutions. In particular, policymakers have been unwilling to let financial institutions that made unwise decisions bear fully the negative consequences of those decisions. Procedures exist to provide liquidity to solvent but illiquid institutions, and other procedures exist to liquidate insolvent institutions. But as the subprime crisis emerged, the government failed to adhere to a consistent policy for dealing with