Liberty is won and preserved not primarily with guns,
but with ideas. Spreading freedom requires that we
spread an understanding of the benefits freedom brings,
that we explain to whomever will listen how freedom is
really in everyone's best interest. In making the case
for a truly free society, however, we will inevitably
come up against a wide array of illiberal beliefs that
keep others from embracing our vision of a better world.
The more we seek to understand those beliefs, the better
we will be able to counter them and address the concerns
that underlie them. In this ongoing series, I address
some of the issues we can expect to face, along with
brief outlines of the kinds of responses I think can be
Some of the things that happen to a person are truly not that person’s fault. Children who are abused, for example, bear not even a share of the blame for the harm that befalls them. Nor do they deserve any praise for eating a nutritious diet, say, at least not when they are very young. As we grow into preteens, adolescents, and young adults, however, we humans gradually begin to appreciate the existence of other minds, to understand that actions have consequences, and to develop the power to control our own behaviour and make our own decisions. In step with this cognitive and psychological development, we gradually deserve more and more of the praise and blame for the things we do and for the things that happen to us.
Yet even a healthy, mature adult is not entirely responsible for every aspect of his or her life. As a general rule, events often have complex causes, and so praise or blame must be parcelled out accordingly. A simple illustration of this is the bicycle accident, of which I have had three since moving to Montreal as a young man.
When Bicycles and Cars Meet
Sounds like a clear case of simple blame, doesn’t it? Checking mirrors and blind spots for cyclists before making a turn is City Driving 101, not to mention signalling one’s intention to turn. Clearly, the driver was to blame. But did I mention that my brakes were shot? Even with fully functioning brakes, I would not have had time to stop, but I doubt my arm would have gone through his window.
My second and third bicycle accidents occurred a few years later while I was working as a bicycle courier one summer during my university studies. In the first of the two, I was zipping along Ontario Street in the Latin Quarter when a car door opened up before me. A second later, I was flying through the air, and I landed some fifteen feet away in the middle of the road. Incredibly, but thanks in no small part to the fact that I was wearing a helmet, I was not badly hurt at all.
Opening your car door after parallel parking without checking for cyclists is extremely negligent and dangerous, and any driver who does this is blameworthy. But did I mention that I was riding along with one hand on my handlebars and the other hand steadying a second bike that rolled along beside me? Also dangerous and stupid, although again, I still would have hit that door had I been riding normally. (Ironically, I was bringing the second bicycle to the bike shop to have its brake pads replaced.)
Just a few weeks later, I was riding west toward downtown along René-Lévesque Boulevard after having delivered a package to the Molson Brewery. I was on the bike path when a taxi driver exiting the parking lot of the CBC Radio-Canada Building failed to look to his right and plowed into me, sending me, once again, into the middle of the road. Thankfully, since he had looked to his left, there was no traffic coming.
This taxi driver certainly deserves practically all of the blame for this accident, though I could have slowed down as a precautionary measure when I saw him, even though he wasn’t moving and I clearly had the right of way. Also, I’d forgotten my helmet that morning, and had I been badly hurt with a head injury, I could have shared some of the blame for that, but thankfully once again, I escaped serious harm.
On to Bigger Things
All of which to illustrate that it
is not always a simple matter to determine blame, and that
often, blame is shared. You may be wondering, though, what
exactly is illiberal about the belief that assigning
blame is simple. Though admittedly, determining responsibility
for bicycle accidents may not have any obvious implications for
liberty, the same cannot be said when it comes to determining
the causes of such things as financial crises. And if the causal
chain explaining a simple bicycle accident is often not even
that simple, it would be very surprising if the global financial
crisis did not have a complex and convoluted explanation.
Some people—including some members of the various Occupy movements and their sympathizers—blame the global financial crisis and its ongoing fallout on greedy bankers. For the sake of enormous profits, these Wall Street wizards took inadvisable risks with our money, the story goes. When the whole house of cards came tumbling down, they used their influence to extort bailouts from governments, which is to say, from taxpayers.
While this story is true enough as far as it goes, it is far from a complete account of the causes of the financial crisis. For one thing, greed is a constant of human nature, and blaming a constant for an unusual event is clearly insufficient. Exceptional occurrences require exceptional explanations. The danger to liberty in not endeavouring to understand the whole story and instead assigning blame solely or even primarily to greedy bankers is that it all too naturally leads to calls for greater regulation of the financial system. But in point of fact, many other causes contributed to the crisis. In his article “A Perfect Storm of Ignorance,” Jeffrey Friedman discusses the “welter of regulations that have grown up across different parts of the economy in such immense profusion that nobody can possibly predict how they will interact with each other.”
A Perfect Storm of Causes
Just to get a sense of the scope of the issues involved, here is a list of the causal links Friedman identifies in his article:
the Federal Reserve stoked inflation, stimulating the housing boom;
Fannie Mae and Freddie Mac encouraged low-equity mortgages;
the Community Reinvestment Act mandated “subprime” loans to poor credit risks;
the Recourse Rule amended the Basel Accords in the United States and lowered the capital cushion requirement for asset-backed securities to a mere 2 percent;
federally mandated mark-to-market accounting translated market fears into actual numbers on banks’ balance sheets, leading to the bankruptcy, on paper, of Lehman Brothers and to commercial banks’ lending freeze;
Basel II spread the Recourse Rule outside the US;
‘no-recourse’ laws in many US states relieved mortgaged homeowners of liability if they just walked away from their homes;
the US tax code discourages partnerships in banking, instead favouring publicly held corporations that are in turn encouraged by certain aspects of tax and securities law to pursue short-term profits;
the tax code makes equity capital unnecessarily expensive;
a 1975 amendment to the SEC’s Net Capital Rule turned the three rating companies (S&P, Moody’s, and Fitch) into a legally protected oligopoly, robbing them of the market discipline that had kept them honest up until then.
Friedman elaborates on
the effects of each of these, and on how they interacted (along
with short-sighted behaviour on the part of bankers and home
buyers alike) to cause the crisis. He then goes even further:
the Basel Accords and prior bank capital regulations were
enacted to deal with the moral hazard of federal deposit
insurance, which would otherwise lead bankers to make
excessively risky investments. Deposit insurance, in turn, was
put in place in America in 1933 to deal with the problem of bank
runs, which were common in the US in the 19th century
and had spread like wildfire at the start of the Great
But bank runs were themselves caused by prior regulations that impeded branch banking. Canada, which had no such impediments, experienced exactly zero bank runs during the Great Depression (and didn’t get deposit insurance until 1967). Writes Friedman, “Thus, deposit insurance, hence capital minima, hence the Basel rules, might all have been a mistake founded on the New Deal legislators’ and regulators’ ignorance of the fact that panics like the ones that had just gripped America were the unintended effects of previous regulations.”
Friedman could have gone further still. As Chris Leithner describes in detail in his book The Evil Princes of Martin Place (which I reviewed earlier this year), fractional reserve banking and legal tender laws are what allow central banks like the Fed to print money out of thin air, which is what gets the whole boom-and-bust cycle going in the first place. Stop protecting the fraud of fractional reserve banking, or at least eliminate legal tender laws and force banks to compete with each other in a free banking system, and you stop inflation dead in its tracks. No inflation, no boom-and-bust cycles—of which the global financial crisis is just an extreme example.
Do irresponsible bankers deserve some of the blame for the mess we’re in? Sure they do. But even bicycle accidents are usually not that simple, and the financial crisis is a whole lot messier than a bike accident. Irresponsible home buyers deserve some of the blame too, of course, but without the morass of regulations that have accumulated over the years, irresponsible bankers and home buyers would be the ones to suffer the consequences of their own actions. As a result, such overly risky behaviour would be discouraged instead of being aided and abetted as it is today.
Part of growing up is taking on more and more personal responsibility for our lives in step with our cognitive and psychological development. But it sure doesn’t help when the system of rules and regulations that should encourage and support such adult behaviour instead incentivizes recklessness.