Undue Faith in Markets

Alright, I don't want to sound too radical on this one. I do believe that markets are often good mechanisms for running the economy. However, I was reading this speech from the Fed Chairman of Atlanta. In the speech, he was talking about the longer term impact of the housing bubble bursting. He ultimately came to this conclusion:

In my view, the most likely story line is one involving a moderate slowdown in economic activity over the coming quarters, with a return to growth near trend by late 2008 as the housing sector begins to recover. Underpinning this story is the view that our modern market economy has a keen ability to self-correct as opportunistic capital moves into depressed markets. Markets correct. And market solutions are preferable. This transition already is happening in the market for subprime mortgages. In this story, financial markets may endure some more weeks or months of volatility, but I believe they will find a restructured state of "normality," involving improved risk management practices, reduced leverage, and greater transparency.

It's a little disconcerting how much faith this man places in markets. He believes that markets will, by their own volition, restructure to prevent any future problems in the housing market. I find this a little hard to believe, considering that the irrationality of markets is what led to this housing crisis in the first place. I would much rather hear him say that institutions would lead to different structures that would be more stable, or that the Fed itself would tighten lending standards (or, God forbid, that the government would subsidize subprime loans, so that lower middle class people need not pay 8 or 9% interest rates to own a home). But, in summary, I don't see markets fixing these things are their own. That sort of belief is not even good neo-classical economics; it's just stupid.