This essay has seems to have prompted widespread anger from libertarians. I think that one of the core failures of the modern libertarian movement is that it is so hip linked to laissez-faire capitalism that its proponents are willing to sacrifice individual liberty in support of private economic interest. Live by the sword, die by the sword I guess. Of course, many of those who seem the most outraged by this are the same who promoted Sarah Palin as a libertarian. In my mind, these people discredited their movement before the financial crisis reached a boiling point. This is just another nail in the coffin.

The argument as a whole is reminiscent of wearying dorm-room debates that took place circa 1989 about whether the fall of the Soviet bloc demonstrated the failure of communism. Academic Marxists were never going to be convinced that anything that happened in the real world could invalidate their belief system.

For reference, here is a pretty decent explanation of the credit crisis:

In this ultra-low rate environment, where prices were appreciating, and most mortgages were being securitized, all that mattered to the mortgage originator was that a BORROWER NOT DEFAULT FOR 90 DAYS (some contracts were 6 Months). The contracts between the firms that originated mortgages and the Wall Street firms that securitized them had explicit warranties. The mortgage seller guaranteed to the mortgage bundle buyer (underwriter) that payments were current, the mortgage holders were valid, and that the loan would not default for 90 or 180 days.

So long as the mortgage did not default in that period of time, it could not be "put back" to the originator. A salesman or mortgage business would only lose their fee if the borrower defaulted within that 3 or 6 month contractually specified period. Indeed, a default gave the buyer the right to return the mortgage and charge back the lender the full purchase price.

What do rational, profit-maximizers do? They put people in houses that would not default in 90 days -- and the easiest way to do that were the 2/28 ARM mortgages. Cheap teaser rates for 24 months, then the big reset. Once the reset occurred 24 months later, it was long off the books of the mortgage originators -- by then, it was Wall Street's problem.

Technically, thats Option-ARM mortgages. See also figure 1.7 on page 8 of this report which shows a massive reset of Alt-A and Option ARM mortgages in 2011. I don't fully understand this chart as it juxtaposes Option ARMs, which are a type of loan with Subprime, which is a type of credit score, but presuming its accurate we may see a second wave housing crisis hit in 2011.

Update: According to this information those option-arms are going to reset sooner.

To the core point, these loan originators took advantage of a loop hole in contracts written by brokers and created loan products that were doomed to fail, and a whole bunch of housing speculators got in on the deal. Wall Street shouldn't have offered that deal, but it did. Regulators should have been allowed to act, but were not. The idea that the market will always forsee these things is wrong. Sometimes the market drives off a cliff.

How the financial collapse killed libertarianism. - By Jacob Weisberg - Slate Magazine