I’m all for being on the side of a private popular backlash against the bailout — I’ve argued that here from the beginning — but we must be careful not to fall into the trap of agreeing that the financial crisis came from some sort of an “excess of capitalism,” as Bill puts it. I heartily recommend reading the work of economist Andrew Lilico across the pond, who has been working hard to tease out what went on. As he puts it,

According to my view, at the heart of the credit crunch was over-payment for innovations of a sort that recurs fairly frequently in a capitalist system. We saw it with the railways, the lightbulb, radio, and dotcom companies. In the credit crunch the innovations in question were new financial products and organizational system. It was not a mistake or a “failure of capitalism” that these financial innovations were “permitted” any more than it was a mistake that dotcom companies were “permitted”. That just is capitalism. But there was over-payment so there were losses – significant losses, sufficient to imply the collapse of a number of the companies involved (as happened with the dotcoms or the railways). Again, failure of companies when there is over-payment is not capitalism failing. It is capitalism working.
Nonetheless, I do believe that policy contributed to making these overpayments worse than was inevitable. In particular, financial regulation over the past twenty years has strived to replace the “buyer beware” (caveat emptor) principle (which was thought to have weaknesses in the finance sector) with regulatory badging by regulators and ratings agencies. Because the system depended for its assessments on these few individuals, when they made mistakes (as was inevitable at some point) they made mistakes for the whole system – they coordinated the errors, creating added systemic risk. The proper answer cannot be to have more invasive regulation, chasing caveat emptor even further out. Rather, the regulatory strategy must be revisited, and responsibility for losses must be placed more squarely back with the providers of capital (including those buying retail financial products and making deposits).

Read the whole thing. Andrew has written a tract for the venerable Centre for Policy Studies, Margaret Thatcher’s favorite think tank, that asks “What Killed Capitalism?” and suggests a useful framework for a genuinely conservative response.