The financial crisis was not an indictment of their worldview, libertarians argue, but a vindication of it. Letting the banks fail would have been painful. But the pain would have been less than it will be now that the government is propping up the housing, banking, and automobile industries. Plus, the economy would have recovered by now. “You’ve probably never heard of the depression of 1920,” says French. “You haven’t heard of it because it came and went in one year, because the government didn’t do anything to prop up failed businesses.” (Other economists argue that the government’s response was actually consistent with the philosophy of John Maynard Keynes.) Letting banks fail would also avoid moral hazard, say libertarians, since investors wouldn’t take such risky bets the next time around.
It’s a compelling story. But like many libertarian narratives, it’s oversimplified. If the biggest banks had failed, bankers wouldn’t have been the only ones punished. Everyone would have lost his money. Investors who had no idea how their dollars were being used—the ratings agencies gave their investments AAA grades, after all—would have gone broke. Homeowners who misunderstood their risky loans would have gone into permanent debt. Sure, the bailouts let some irresponsible people off easy. But not intervening would have unfairly punished a much greater number.
There’s always tension between freedom and fairness. We want less government regulation, but not when it means firms can hire cheap child labor. We want a free market, but not so bankers can deceive investors. Libertarianism, in promoting freedom above all else, pretends the tension doesn’t exist.