I spent last week on a business trip in Edinburgh, Scotland. Scotland of course was the home of Adam Smith, the father in many ways of the free market system. I stood before his statute on the Royal Mile and pondered what would he think of the current financial crisis? And then, what would his thoughts matter? The crisis has been caused by something that Smith could have never imagined. I doubt he would have much to say about the mechanics of subprime mortgages.
Or maybe he would. Would he have been worried about government interference in the real estate market? Or maybe he would have been more concerned about monetary policy, or the lack thereof.
This is not the first financial panic in history. They used to happen fairly regularly. Smith was obviously aware of the South Sea and Mississippi Company bubbles earlier in the 18th Century. It was those bubbles that probably kickstarted the Scottish interest in economics that flowered with Smith. And this panic looks a lot like that of 1907, with the bursting of a commodity bubble leading to panic on Wall Street and Main Street.
I do not know what Adam Smith would think. But I do know that we have been through this before, and will get through it again.