The cause of the housing market meltdown, according to libertarians

Conventional wisdom blames the collapse of the housing market -- and, thereby, the broader credit market collapse which appears to be about to drive us into recession -- on the deregulation of the mortgage and financial industry that, first, allowed lenders to offer homeowners ill-advised mortgages and, second, allowed financiers to build complex investment instruments on top of these ill-advised mortgages. Or, as an economist writing for that most infamous of socialist organisations, the Bank for International Settlements (an international organization of central banks), put it (PDF),

Compared with other countries, the United States seems to have: built up a larger overhang of excess housing supply; experienced a greater easing in mortgage lending standards; and ended up with a household sector more vulnerable to falling housing prices.

Since the obvious long-term remedy on this account -- stronger government regulation of the housing market -- is antithetical to libertarian principles, I've been wondering for the past week what libertarians think caused this mess, and what should be done (including nothing because the market will sort itself out, &c.). Not so much that I've bothered to ask any of my libertarian friends. Just an idle curiosity. In particular, after reading Andrew Leonard's schadenfreudisch announcement that deregulation is, essentially, dead, I wandered over to Reason. Where I read this:

Easy money from the Federal Reserve, coupled with easy credit provided indirectly via the Community Reinvestment Act and directly via government-sponsored-enterprises Fannie Mae and Freddie Mac created an unsustainable housing bubble. By corrupting the standard of value and bullying financial institutions into giving loans to the unqualified, these government actions distorted relative prices and caused generalized errors in economic calculations and investment decisions.

Now, the next paragraph is an argument that the just-passed bailout plan is tantamount to Soviet-style economic planning. And he later misconstrues the bailout as `[a]llowing investment banks to go to the government for a $700 billion line of credit'. So perhaps your sensible intellectual libertarian isn't going to consider this the libertarian analysis of the housing market over the last five years.

But what the hell. Let's take a closer look at the account. If it's right, the housing bubble was created by a confluence of three factors. We'll take them one at a time.

1. `Easy money from the Federal Reserve'
   
   I simply have no idea what this is supposed to mean. The Fed does three things: buy and sell US treasury securities on the open market, make short-term loans to private banks so they can maintain liquidity, and specify the amount of funds banks must keep on hand (ie, not loan out). They don't just give money away.
   
   
2. `easy credit provided indirectly via the Community Reinvestment Act'
   
   The Community Reinvestment Act is a 1977 bill designed to prevent redlining -- offering borrowers worse terms on their mortgages based on their race, ethnicity, or neighbourhood. The idea, I guess, is that requiring banks to offers loans based on quantifiable criteria effectively required them to offer loans that lenders couldn't pay back. I'm far from an expert, but the quotations, paraphrases, and references on this Wikipedia page seem to be telling: there appears to be a great deal of empirical evidence against this claim, and little to none in support of it.
   
   
3. `easy credit provided ... directly via government-sponsored-enterprises Fannie Mae and Freddie Mac'
   
   Again, I have no idea what this is supposed to mean. `Fannie Mae receives no direct government funding or backing; Fannie Mae securities carry no government guarantee of being repaid. This is explicitly stated in the law that authorizes GSEs [Fannie Mae and Freddie Mac], on the securities themselves, and in many public communications issued by Fannie Mae.' So neither is government sponsored. At least in any sense of the term that would imply they receive sponsorship from the government. They also don't provide credit. They buy mortgages in the secondary market, ie, from the lenders that do provide credit. This helps create liquidity, thereby making it easier to get a loan -- not because the loan costs less, but because lenders have more money with which to make loans.
   

So. `The' libertarian account blames the housing market collapse on government interference, in the form of three purported causal factors. Two of which are incoherent on their face, and third that seems to lack empirical support. Maybe I'm missing something, but it's not exactly a compelling laissez-faire alternative to mainstream narrative.

By the way, if you were wondering how our Reason writer would actually fix the mess, he says we need `a more rational conversation about how to remove real barriers to better-functioning markets'. I'm guessing this translates into `talking the markets up' and more deregulation.