Stop Demonizing/Sanctifying Free Market

Stop Demonizing/Sanctifying Free Market

4
8
SHARE

I keep hearing that the financial crisis is some grand rebuke of free market principles. I also keep hearing that the bailout plan will ruin the free market. What I’m not hearing is what I believe is the most accurate description of the situation: we never had a true free market to begin with.

Those who want to use the current crisis to bash the free market leave out some key points. Namely, government actions helped lay the groundwork for the meltdown. When examining how fast everything went bad, we can’t forget the role played by mortgage giants Fannie Mae and Freddie Mac. Those two institutions enjoyed a special relationship with the government that allowed them to take on a ridiculous level of risk far beyond what any real free market would have reasonably allowed. Additionally, we can’t forget how the Federal Reserve stridently maintained low interest rates, encouraging a level of unsound lending that, again, a real free market would have been unlikely to allow.

This by no means excuses the ignorance and greed of the private financial institutions that made so many catastrophic decisions. Nor does this excuse politicians who had neither the intelligence nor the will to put proper regulations and oversight in place. My point is simply: it’s ridiculous to blame or protect the free market as if it is some pure entity of evil or good.

We have, at best, a semi-free market. And this semi-free market failed because of actions taken in both the private and public sectors. Yes, it is a systematic failure. But it is not a failure of principle. It is a failure of people. There is no grand principle at work here. That’s why it’s rather opportunistic to blame the free market for the crisis or to pretend as if a bailout will somehow destroy that free market. You might as well blame Santa Claus for not filling your stocking.

I think we can continue to admire and support the power of free market economics while also recognizing the need for a certain level of government regulation and financial backing. A bailout is needed at the moment. After that, we can work on reforming the rat’s nest of regulations that currently exist. The more we recognize that our economy is and always will be a public-private affair, the more we can address our problems rationally. This is not a moment for ideological grandstanding. Such inanity just adds more obstacles in our pursuit for a solution.

  • http://www.donklephant.com Justin Gardner

    What I’m not hearing is what I believe is the most accurate description of the situation: we never had a true free market to begin with.

    Actually, not that your comment was directed at me, but this is what I’ve been arguing all along. That the “Free Market,” as it has existed for the past 3 decades, has failed us in this instance.

    Does it mean that it is a completely failed system? No. But anybody who doesn’t recognize that the same market that help caused this mess is now not willing to prevent a once-in-a-lifetime economic disaster is fooling themselves that it’s not the market’s responsibility.

    My point has been that the market does not do well when it comes to “fundamentals.” All we see is bubble after bubble, and so these entities (like Freddie and Fannie) should be nationalized so our infrastructure needs are stable and won’t bend to the whims of speculators, short sellers, etc.

    In any event, good post.

  • http://www.pandemiclabs.com/pandemicblog Brennan

    This is SUCH necessary commentary. I find two things amazing here:

    1) How effectively politicians frame the debate and limit the negative responses people will have and where they lay blame.

    2) How the American people let the misdirection happen without a peep.

    The only thing you hear now is how this is a failure of the free market… might it also be worth considering that the market was FREE ENOUGH to begin with? I’m not advocating this point at all. However, it’s scary to me how people seem to not be aware that the other, equally-likely, option even exists.

    This is similar to how both parties barely touch on reducing government spending as a way to balance the budget. The repubs do, but they only talk in small dollar terms as lip service to win votes. No one even mentions the libertarian option of actually shrinking the govt.

    There are other solutions to making ends meet than raising taxes… even if the two main parties would have you think otherwise.

    Great post.

  • Togakangaroo

    Exactly what I’ve been trying to say for the last week!

    Its also just as dishonest to blame “opportunistic bankers” that acted in their natural interests which would have been fine within a free market (ugh, that term is getting burdensome), but off the mark in the system that had evolved.

    Oh, and while I’m at it, its also silly to blame corruption (ok, there was some but no company-wide satanic rituals) or lobbying when these are all things that are allowed and encouraged by the system itself.

    Its like an aging automobile, something is bound to fail eventually, so haul it in, refurbish it, and send it out again, doesn’t mean the wheel was a horrible idea.

  • http://www.pandemiclabs.com/pandemicblog Brennan

    Should have said “*wasn’t FREE ENOUGH”

  • mdgeorge

    Alan,

    This post reminded me of a lengthy article I read a while back about Obama’s economic ideology, I’m pretty sure this is it:

    http://www.nytimes.com/2008/08/24/magazine/24Obamanomics-t.html?_r=1&oref=slogin

    IIRC what I took away from that article is that while Obama is in some sense connected to the “chicago school” or “free market” ideology, and understands that markets are an important instrument, he also recognizes that markets need direction and guidance from the government so that they can work towards the goals we have as a society. It sounds to me like he would agree with your statement “we can continue to admire and support the power of free market economics while also recognizing the need for a certain level of government regulation and financial backing”.

  • http://sporkmonger.com/ Bob Aman

    At this point, I’m beginning to think the original bailout with no oversight was the best way to go. I know, that sounds weird, but this bailout thing is, at best, a band-aid on a gaping wound caused by financial impalement. The “bailout” is better thought of as a way to shock some sense into an irrational market rather than an actual bailout. And with that in mind, the countless pages of cruft tacked onto the bill aren’t going to help one little bit.

    That said, we’ve still been impaled, and this $700 billion defibrillator isn’t going to do enough.

  • http://sporkmonger.com/ Bob Aman

    Oh, and incidentally, with all this free market talk, I think it should be pointed out that free markets don’t work without sufficient transparency, ideology to the contrary notwithstanding. Punishment should always fit the crime. Free markets can’t judge the degree of the crime if they can’t see the stuff that’s not on the books. You can know there’s a problem, but if you don’t know how bad it is, how do you judge the true value (or lack of value) of some equity? When Bear Stearns tanked, everyone was stunned by just how low JPMorgan’s offer was. JPMorgan got to see the books, while everyone else on the market was just guessing.

    Hiding trillions of dollars of mortgages, bad or otherwise, in such a way that they don’t end up on the books is always going to be bad for the economy as a whole.

  • http://www.warning1938alert.ytmnd.com Jimmy the Dhimmi

    Hear hear to ASC.

    MD George said:

    [Obama] also recognizes that markets need direction and guidance from the government so that they can work towards the goals we have as a society.

    Government “guidance” in the form of coercive social policy is what got us into this mess. The government is there to prevent fraud in the system, not to encourage it by backing up worthless paper in order to achieve social “goals.”