At one point Horwitz writes,
One of the biggest confusions in the current mess is the claim that it is the result of greed. The problem with that explanation is that greed is always a feature of human interaction. It always has been. Why, all of a sudden, has greed produced so much harm? And why only in one sector of the economy? After all, isn't there plenty of greed elsewhere? Firms are indeed profit seekers. And they will seek after profit where the institutional incentives are such that profit is available. In a free market, firms profit by providing the goods that consumers want at prices they are willing to pay. (My friends, don't stop reading there even if you disagree - now you know how I feel when you claim this mess is a failure of free markets - at least finish this paragraph.) However, regulations and policies and even the rhetoric of powerful political actors can change the incentives to profit. Regulations can make it harder for firms to minimize their risk by requiring that they make loans to marginal borrowers. Government institutions can encourage banks to take on extra risk by offering an implicit government guarantee if those risks fail. Policies can direct self-interest into activities that only serve corporate profits, not the public.The whole letter is worth taking the time to read.
(HT: The Austrian Economists)
Update: The visible hand in economics asks Does the credit crisis indicate the failure of the “free market”. Matt sees the issue as one of asymmetric information, which must be to a degree true. But I'm not sure it is one of the primary causes of the current mess. I think a lot of people knew what they are trading and traded anyway due to the incentives provided by the government or its agencies. So I see the causes as more to do with incentives than information.