We must win the intellectual debate. This crisis was caused by government, not by freedom. The solution is more freedom, not more government.
“In fact, much of AIG’s problem was caused by credit default swaps and regulation. After Hank Greenberg was ousted from AIG, the company began to get heavily involved in the credit default swap market. That market was growing in large part because of banking regulation. . .
Banks around the world operate under rules that determine how much capital they must hold in reserve. The rules say that a riskier the assets held by a bank, the larger the reserve they have to maintain. One way to reduce the riskiness of your assets was to buy insurance on them. This created a huge demand for credit default swaps as a kind of regulatory arbitrage, banks trying to comply with regulations while maximizing their own profits. Let’s use an example. Say you are running a bank in Europe. You have a bunch of deposits you want to invest, and you want to invest those in assets that will give you the highest return with the lowest risk. If you buy a bunch of high-yield loans, that is counter-productive. Even if you earn more for each dollar you invest, the reserve requirements will tell you that you can’t invest as much. Now if you throw a credit default swap on, which you can buy cheaply from AIG, you can invest more of your depositors money in highly rated securities. In effect, you get extra-credit for the swap when calculating your reserve requirements.
But isn’t it insane for banks to keep buying insurance policies from a company that obviously couldn’t pay them back? After all, AIG sold $527 billion of these. There’s no way it could make good on even a tiny fraction of them. But bankers didn’t see it that way. They didn’t expect to ever collect on the insurance policies. The main reason they bought them was because the regulations rewarded them for buying them, allowing them to hold less money in reserve and invest more.” (Read more from businessinsider.com)