Not only have you not read enough of David, but you seem to have missed the point of his comment, which was that failure and its revelation is a part of the efficiency of markets. The instruments you complain about, and I agree with your blaming the private parties who created them, have been shown to be failures.

Certainly a free market dogmatist would have quite a good point in noting that if they were government created vehicles they would just be given more money (say like Freddie and Fannie.) Oh wait, that is happening to a large extent anyway. Hmmmm…..

I think that only reinforces the point, it just shows the government is willing to prop up bad policies and products of the private sector as well.

The laws and regulations were on the books to stop these lending practices. They were not enforced. Do I fault Bush and Clinton? Certainly. Do I fault Greenspan? A lot. But even the borrowers are to be faulted — there loans did not pass the smell test of “I shouldn’t be able to afford this nice…” but as at the movies, they suspended disbelief, and played along, together with a horde of self interested enablers.

My main points are twofold: with fiat money, credit must be regulated, and the government failed to do that, not the market — markets don’t don’t self-regulate, they just set prices. Second, the boom-bust cycle can’t be eliminated. Attempts to eliminate it create a bigger boom-bust cycle eventually as bad investments grow.

The innovative mortgage instruments at the core of this crisis did not come from government. Government did not force lenders to give money to unqualified applicants or to creat no principal payment loans, or loans whose rate increased beyond the recipients ability to pay. The “efficient” markets failed.

Government didn’t help by allowing this to happen but it’s indisputable that left alone, deregulated, markets have a tendency to destroy themselves. Our experience over the past 25 years repeatedly confirms this truism.