Liberals are so ecstatic over the recent financial crisis that they have lost all contact with reality. Witness Harold Meyerson in The Washington Post:

In 1949, a number of famous writers, among them Arthur Koestler, André Gide, Richard Wright, Stephen Spender and Ignazio Silone, wrote essays explaining why they were no longer communists. The essays were collected in a volume entitled “The God That Failed.”

Today, conservative intellectuals might want to consider writing a tome on the failure of their own beloved deity, unregulated capitalism. The fall of the financial system has been so fast and far-reaching that there’s been no time to fully consider its implications for the reigning economic theology of the past 30 years.

Rest assured, conservative intellectuals are not considering any such project. The reason: this crisis was caused by too much government intervention in the marketplace not too little. The starting point for the current financial meltdown is the U.S. residential real estate market. Th U.S. residential real estate market is far from unregulated. As Nobel Prize winning economist Paul Krugman wrote in 2005:

But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions – hence “zoned” – makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles.

In other words, government regulations made certain parts of the U.S. prone to housing bubbles. But the government’s key role did not end their. The government also heavily subsidized the mortgage securitization market. The government sponsored entities Fannie Mae and Freddie Mac leveraged their government given advantages (lower capital requirements than real private companies, guaranteed access to federal credit that real private companies did not have, and an industry-wide assumption that their debt was federally guaranteed) to create a massive government mortgage duopoly. Due to this massive government intervention in the mortgage financing market, Fannie and Freddie hold more than half of all U.S. mortgage debt. Only Meyerson could assert with a straight face that such a market was “unregulated.”

Meyerson approvingly cites both Warren Buffet and Geroge Soros as critics of free markets. But Meyerson should do his research. Both Soros and Buffet have identified Fannie and Freddie as key causes to the current crisis.

Soros wrote in the Wall Street Journal:

The business model of Government Sponsored Entities (GSEs) in which profits accrue to the private sector but risks are underwritten by the public has proven unworkable. … It would be a grave mistake to preserve the GSEs in anything resembling their current form.

Buffet told CNBC:

They insured mortgages on a huge scale, trillions, and then they ran sort of a hedge fund, a carry trade where they bought mortgages and borrowed extensively against them. And because they had really the backing of the United States government–and everybody assumed they had the backing. I assumed it. And the truth is they do have the backing of the United States government in terms of their debt, not in terms of their equity–they were able to borrow without any normal restraints in terms of capital or margin requirements or anything of the sort. They had a blank-check from the federal government. …

And they also had an added problem in that they had a dual mission. The government expected them to promote housing and the stockholders expected them to raise the earnings substantially every year. And as the years went by, they mphasized the latter more and more. They started talking about “steady Freddie,” and Fannie Mae said, `We’re going to increase the earnings at 15 percent a year.’ Any large financial institution that tells you that sort of thing is giving you a line of baloney. I mean, they may do it for a while, but when they can’t do it with operations, they do it with accounting and they cheat. And that’s what happened at both those places on a huge, huge scale.