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Originally Posted by Gabo  In a free market, the market would crash (like it has), creating a small but severe dip in productivity while loans default, bankruptcies are declared, bad debt is rectified, and the market realigns. Within a year, things would turn around and the market would resume under normal conditions. This is what happened during the recession of 1920. |
I like your interpretation. I'll offer a minor disagreement but we agree in principle here. I'd say that in a free market, there would have been no subprime loans, there would have been no bubble in the housing market, and there would have been no overexpansion of credit. That's because a free market would be lacking government controlled companies like Fannie Mae and Freddie Mac which can extend loans to people without valid credit (what the free market would evaluate is valid) and cause other private companies to compete with them. There would have been a free banking system in a free market, rather than a fiat dollar and a federal reserve which controls interest rates.