President Obama has written about the need for balance between the free market and government regulations in the Wall Street Journal today. In the process, however, he repeats a canard about how insufficient regulation "caused" the financial crisis of 2008:

Sometimes, those rules have gotten out of balance, placing unreasonable burdens on business—burdens that have stifled innovation and have had a chilling effect on growth and jobs. At other times, we have failed to meet our basic responsibility to protect the public interest, leading to disastrous consequences. Such was the case in the run-up to the financial crisis from which we are still recovering. There, a lack of proper oversight and transparency nearly led to the collapse of the financial markets and a full-scale Depression.

The crisis was the result of a complex "perfect storm" of factors. While transparency in financial markets (particularly the mortgage market) was severely lacking, the idea that a dearth of government interference in the marketplace led to the crisis is dubious. As economist Raghuram Rajan has argued, it was the government's role in encouraging the irresponsible extension of credit--a bipartisan effort--that is more to blame. Christopher Caldwell wrote about this last year: Rajan puts it with some understatement, “the United States is singularly unprepared for jobless recoveries.” This is only partly because the United States has a weaker welfare state than other industrialized countries. It is also because the American safety net—in which government provides fewer health and retirement benefits but incentivizes employers to fill the gap—winds up placing all of a person’s eggs in the basket of his job. Lose your job and you lose not only your income but also your (and your children’s) health insurance and possibly (as in several scandalous recent cases) your pension. Under such circumstances, any recession with the slightest perceptible effect on the public will end political careers by the score. And recessions are, alas, inevitable. The result, under both Democratic and Republican leadership, has been reckless government extension of credit. As a remedy for downturns, this has two political advantages. First, it does not bother conservatives as much as handouts do. Second, “easy credit has large, positive, immediate, and widely distributed benefits, whereas the costs all lie in the future. It has a payoff structure that is precisely the one desired by politicians, which is why so many countries have succumbed to its lure.” You might say that the financial crisis reflects the emergence of the off-balance-sheet liabilities—the human costs—of deindustrialization.... The overarching point is that, whereas European countries until about a decade ago addressed sluggish job creation by expanding their welfare states (which made job creation more sluggish still), the United States chose a different path that proved just as counterproductive. It spread a safety net under its less fortunate citizens through wanton credit creation. And the terrible problem of credit is that it resembles alcohol—as the dosage rises, the problems get bigger, but so does the capacity to ignore them.

Casting the crisis as a result of laissez-faire capitalism is simple and has political benefits for the president and Democrats. But it's also a red herring. The real question is if government ought to encourage these kinds of dangerous lending and borrowing practices. The answer seems to be "no", as the government's own record on this question should indicate.