The debate, then, is a contest of theories. Free-market theory can explain the cause of the crisis -- government intervention in the mortgage market through promotion of easy home-buying and implicit guarantees to lenders and underwriters, including its privileged creatures, Fannie Mae and Freddie Mac. Given that genesis of the problems and the general theory of markets, the solution is for government to back off -- way off -- and to let the economy adjust to real conditions and recover without subsidy, guarantee, or regulation. What is the alternative theory used by those who have jettisoned free-market theory in "this time of crisis"?
Good question. They are not acting on any known theory but are acting in panic mode to the crisis they created in an attempt to save their own butts. I call this the Omigod I Screwed Up and I Better Fix It Before They Find Out I'm Responsible Theory (OISUIBFIBTFOIRT).
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