Skip to comments.The attack on free markets
Posted on 12/11/2008 8:03:35 AM PST by rabscuttle385
Popular opinion assigns blame to greedy capitalists and a market gone wild for the financial crisis. The remedy for those who hold that view is government bailouts, fiscal stimulus and regulation. Even the head of the worlds freest economy, Hong Kong Chief Executive Donald Tsang, said in his annual policy address, When the market fails, the government should be prepared to intervene in a timely and decisive manner.
When the history of this crisis is written, it could be a story of the death of market liberalism and the ascent of market socialism. Yet the truth is that the source of the crisis was not private free markets, but markets tainted by mistaken government policies designed to satisfy special interest groups.
U.S. monetary policy was too loose for too long, an error Alan Greenspan has still not admitted; government privileges bestowed on Fannie Mae and Freddie Mac, especially the implicit (now explicit) guarantee backing their debt, politicized the flow of capital, increased risk-taking and fueled overinvestment in the housing sector; and rating agencies and regulators who were supposed to monitor risk-taking were asleep at the wheel.
Markets require an institutional framework in which private property rights are well-defined and risk is clearly assigned. The purpose of regulation should be to ensure that those who take risks bear the full cost of them and can capture the full reward from them. Competition is the best device to discipline private traders and investors. Often, however, regulation reduces or outlaws competition and imposes rules thwarting market forces and individual responsibility.
Government failure, not market failure, would be a more accurate description of the subprime/credit crisis. There would have been less risk-taking and more market discipline if Congress had not guaranteed Fannie and Freddie debt and had not passed the Community Reinvestment Act, which pressured banks to promote subprime and Alt-A mortgages. Moreover, by holding the Federal funds target rate at 1 percent from July 2003 to June 2004, the Fed fueled the housing boom.
With the large bailouts now occurring, the mistakes made in underpricing risk and overextending credit will be felt by present and future taxpayers. The socialization of risk and the privatization of profits is always a recipe for disaster. It undermines the rule of law and economic freedom by weakening private property rights. When investors believe government will bail them out, they increase their risk-taking and leverage, just as Bear Stearns and other large investment banks did. And when foreign central banks know that the U.S. Treasury stands behind the debt of government-sponsored mortgage lenders, there will be an artificially large market for their securities.
The problem with Treasury Secretary Henry Paulsons plan for resolving the subprime crisis by taking an equity stake in the troubled firms is that it substitutes public for private ownership. Hence, it shifts responsibility from those who made poor investment decisions and took on too much risk to those who did not. A little-discussed consequence is to severely undermine the moral basis of a free market the ethic of individual accountability.
The $700 billion bailout plan the Troubled Assets Relief Program was planned to have the Treasury purchase toxic assets, in addition to injecting new capital into financial institutions. But why should we expect government bureaucrats or their agents who are spending other peoples money to discover correct asset values? More likely, the Treasury will pay inflated prices and fail to maximize taxpayer wealth.
Without private ownership, there can be no real markets to determine asset values. That is a forgotten lesson Nobel laureate economist F. A. Hayek underscored in his criticism of market socialism.
The fear, of course, is that without widespread government support, capitalism would collapse. But as L. William Seidman and David Cooke, former officials at the Federal Deposit Insurance Corp., note, In our experience, government ownership and management of assets rarely increases value. Moving assets openly, fairly, and promptly to sound private-sector owners is the best way to minimize taxpayers losses.
To restore liquidity to markets means to restore trust both in the actuarial models used to price complex securities and in the guarantees made in private contractual promises. Before credibility can return to financial markets, however, there must be a restoration of confidence in government as the protector and guarantor of our economic liberties. That is the real challenge not only for president-elect Barack Obama and the incoming Congress, but for all those who wish to preserve economic and personal freedom.
James A. Dorn is vice president for academic affairs at the Cato Institute and professor of economics at Towson University.
>Yet the truth is that the source of the crisis was not private free markets, but markets tainted by mistaken government policies designed to satisfy special interest groups.<
Isn’t that the truth! I’m shocked that a journalist would get it correct in this day and age.
I was mistaken, the writer is James A. Dorn is vice president for academic affairs at the Cato Institute and professor of economics at Towson University.
Well, it wasn’t a journalist. The columnist is with CATO. :P
I’m becoming convinced that we are witnessing the orchestrated and coerced nationalization of everything. I’m not the smartest guy in the world, but even I have to wonder if the “policies” put in place over the last number of years weren’t intended to bring it down intentionally so as to put this other thing in place?
You can’t help but wonder. Is this setting up for the Amero and the North American Union? Perhaps a new global currency? Perhaps even nothing at all. I guess we’ll see. It is kind of depressing to think of it as a mass nationalization move where this could be the point where we completely abandon the idea of individualism and private property, but as of now I doubt it. There are still too many of us with guns who know how to use them and who cherish liberty.
It’s kind of fun to entertain all these thoughts. Who knows if any of them actually have much merit. I guess we’ll find out soon enough.
The reason both parties blame the markets is the CRA bill that Clinton signed in 1999 was passed by the Republican controlled congress and I am willing to bet that McCain voted FOR that POS.
Not shocking — wasn’t a journalist.
Yes, all my stuff is mere speculation. Comparable to the story line one might use for a paperback novel. Of course, sometimes I think we’re likely to read more actual truth in what’s sold in the “fiction” aisle than in the newpapers.
“Before credibility can return to financial markets, however, there must be a restoration of confidence in government as the protector and guarantor of our economic liberties.”
Not happening........in my lifetime.
The US automakers have gotten fat, dumb and happy. Similar to the current housing bubble and the previous e-commerce boom and bust, valuations were inflated and now we are experiencing a correction — meaning that prices are being adjusted to actual value rather than perceived value.
If we want to rescue the US economy, what we must do is abolish taxes on income, savings and investment. Then replace them with consumption taxes. That will eliminate the liquidity problem and the economy will take off like a rocket. Don’t expect that to happen under Obama’s promised National Socialist agenda.
Companies with inflated labor costs like the auto industry will adjust or be replaced. Let us not forget that foreign-designed cars are being made in the US. If the demand for cars is the same, these union-contract jobs will be replaced with ones that pay wages that are competitive in the world market. Quite unlike they are today.
The attack on free markets occurs when central banks incorrectly blame economic growth for inflation, and invert their yield curves in order to stop economic growth, but nobody ever complains about that. The only time people complain is when the government tries to step in to clean up its own mess.
I think the three of us could probably build a pretty solid argument that this recession was timed and planned with bringing in a non-citizen communist president to lead us into national socialism. This includes changing over our financial system to the Amero dollar of course.
The New World Order has been discussed on FR for a few years now. Agenda 21 is openly running smoothly in Europe and soon (one decade) America will look just like Britain does. The shifting flow of workers across our borders as they are needed will become an everyday occurrence.
Be prepared to give a final salute to the Republic because soon the UN Charter will be mounted on the walls of the Pentagon, every post office, bank, school, state and federal office across these united States.
It certainly is scary to think about. What I fear is the US merging with Canada and Mexico, the establishment of the Amero, a new non-national global currency (the worldo or gaio or terro perhaps haha), and a greatly strengthened UN with global taxing and judicial power, even if control is centered around the Western world and not dictated by third world countries.
The scariest thing to me though is the idea that we as people will demand this new world government or at least cozy up to the it and deem it necessary.
This recession travel across the world in a couple of weeks. Sectors of every country were hit hard. They knew something was happening and it was affecting them. It only made sense that it originated in the US because we were the worlds largest free spender. Operating with a deficiency budget didn’t bother our legislators at all. After all it was a debt that they never had to be concerned about paying off. Us citizens didn’t lose sleep over it because we couldn’t get anyone with any authority to care about it.
When Bush got going on the free trade amendments in his first term, he had solid backing here on FR by a trained team of free trade marketers. Globalism was marching forward no matter what us idiot protesters thought. He tried a couple of times to get L.O.S.T. passed a couple of times and when us anti UN fools screamed we were shut down by the Bush Bots.
Well now that globalism is firmly established and the free trade markets have collapsed I can only hope that as we slip into this depression that the Bush Bots get a second look at what he has accomplished.
Correct me if I am wrong, government can only do one thing, take wealth from some people to give to another, through taxes, spending and printing. The idea is that federal government knows what’s best for the greater number of people.
They cant really just make money and give it away (beyond above), but right now we are being told that deflation allows the feds to get money for free, printing during deflation.
It’s considerably ironic that Mr. Dorn deals with your concern in the first two paragraphs.
The free trade agreements are socialism or don’t you recognize that? The free trade markets operating under free trade agreements are not private free markets.
Don’t bother replying.
I’m just curious as to what sort of “conservative” pathology results in free trade being blamed for the subprime meltdown, or an economic recession in general.
So the government dictating from whom and to whom businesses can buy and sell goods overseas is actually a "free" market? That makes absolutely no sense.
Some FReepers think it is but I don’t.
It really places them in an, um, unique position: arguing against government intervention by advocating government intervention.
There wouldn’t need to be trade agreements in the first place if there wasn’t a large percentage of the voting public who just could not accepted the fact that other people demand imported goods. Unfortunately, there are too many people that wish to use government as a tool for keeping imported products out — thinking that those that demand foreign goods must be protected from getting what is perceived as good value. The trade agreements, therefore, seek to lower trade barriers...but they always manage to sneek in provisions that protect some industries and shield them from competition.
You do not have to like this for it to be true.
You don't like this because it doesn't fit the ideological picture of goodness you've been raised on since Reagan. Tough freaking toenails, it is still true. Private bankers can take the risks and narrow the epic credit spreads currently out there, any time they choose. But they are choosing not to, in craven fear. When they abdicated, government gets their jobs.
Facts are even more stubborn than ideological blockheads.
RE :”Right now, no one is, the possible profits are going begging and unused, and the government is the creditor in a position to take advantage of that, to any extent it desires. “
Or to take advantage of losses because the governments motives are purely political and profits and debt are meaningless. The Obama/Pelosi buzz phrase “ protect taxpayers” when they plan on spending any dime returned, and MORE. The banks wont lend because they were loaned, not given the money, until forced to loan and lose.
You don't get a margin for error and you don't get any points for being less idiotic than socialist Dems.
RE :”...and you don’t get any points for being less idiotic than socialist Dems. “
Yes you do because they won two elections and now have White House and congress and finally have to defend their positions. So we have no incentive to help them nationalize every major industry (punishing successes rewarding failure) even if you happen to think it is the lesser of two evils. That “lesser of two evils” argument was used to promote McCain and you can see how well that worked. Call it the “I stand for nothing” argument=’I inspire no one” argument.
You don't have to help them do anything, but that is only because you are utterly irrelevant. If congress won't act then the treasury will, and then the new administration will.
Practical men live in reality, ideologues do not. You have no power because the last particle of practicality left your head about 3 exits back. You are only prepared for a world in which businessmen are flawless enterprising brave and resourceful. As a fact, they are currently a pack of cringing incompetent cowards throwing every cent they have at the government, begging it to save them.
Someone will be a banker. If bankers won't, then the Fed or treasury will. Parties have nothing to do with that, nor ideologies, nor blame, nor defense, nor spin, nor fairy tale stories of any description. Private bankers have abdicated. Public ones in the civil service will therefore take over and do their jobs, until they recover their nerve.
Your opinion about that development has exactly nothing to do with it being necessary or its occurring.
That’s a nice attempt to whitewash investment banking’s role in the whole fiasco. Their enthusiasm for subprime paper exceeded the wildest imaginations of the do-gooders who were promoting the CRA. Wall Street couldn’t get enough of that garbage paper to repackage and sell to suckers all across the globe, so they were extending credit lines to the thousands of subprime storefront lenders popping up all over the country.
If we still had the Glass-Steagall Act in force then we wouldn’t have had investment banks crowding into the mortgage market and fueling the toxic loans that exploded with spectacular effect.