The Fed's Fatal Conceit

I strongly believe that the recent financial crisis, ensuing recession, and slow recovery were primarily caused by government policy. The Federal Reserve made some very bad monetary decisions that created a bubble, i.e., a massive malinvestment. The bubble ended up being focused in the housing market largely because of government affordable housing policies — specifically, the actions of Freddie Mac and Fannie Mae, government-sponsored enterprises that would not exist in a free market. When Freddie and Fannie failed, they owed $5.5 trillion including $2 trillion in affordable housing (subprime) loans. It's true that a number of banks made serious mistakes, and I would have let them fail, but their mistakes were secondary and within the context of government policy.I've known many people in the Federal Reserve, in monetary policy. They are very smart people. They are highly committed people. However, in my experience, they are guilty of what F. A. Hayek (1989) called "the fatal conceit" — that is, the belief that smart people can do the impossible. I don't care how smart you are or how great your mathematical models are, you cannot coordinate the economic activity of seven billion people on this planet.The real issue is: What does government policy incentivize realworld human beings to do? I'm going to share with you my own experiences in that regard and also my insights into the actions of other financial company CEOs