Don’t Blame Free Markets for the Crisis: They Never Existed

A rhetorical question for free-market critics: Do the following policies reflect a laissez-faire economy?

#1 – Artificially cheap money - America’s central bank regularly provides heaps of cash to their member banks, especially when unsustainable rallies stall and sputter. Liquidity is the cause and the cure. This is anything but laissez-faire. Keeping interest rates low mangles the free-market, rewarding reckless borrowers and lenders, and punishing savers.

#2 – Bailouts – Banks feel safe taking huge risks, and for good reason. The taxpayer will surely bail them out. The absolute worst-case scenario for an executive who loses billions is getting fired. But when you only need a few months to make millions, who cares about getting canned?

#3 – Meddling in Housing; Freddie, Fannie & More – The housing market has been propped-up too long. The stated goal of GSEs like Fannie and Freddie are to facilitate affordable housing. Problem is, they’re become a significant part of the problem. They contributed to the housing bubble, and shifted debt from private to public hands. Further bailouts seem inevitable. In short, they are anything-but free-market.

Laissez-Faire Still Takes The Blame

Despite all this, free-markets remain the favored scapegoat of this crisis. David Leonhardt’s NYT piece titled Greenspan’s Mea Culpa captured wrong-headed use of laissez-faire perfectly:

Over the last 30 years or so years, the world has been deeply influenced by a laissez-faire economic philosophy, which has shifted the world toward an embrace of markets… But it certainly seems as if this country, at least, went too far toward laissez-faire economics.

Leonhardt goes on to blame the housing bubble on a lack of regulation from Greenspan and the Fed. We agree on where the fault lies. The Fed certainly did blow their regulatory duties. But his argument, like most made by free-market critics, ignores the real causes. The root of the problem lies in gross government intervention, primarily in two forms:

• Bailouts – As long as bankers can count on taxpayer-funded rescues, any mention of a “free-market” is laughable. As Elizabeth Warren recently stated, “Until we have a credible liquidation threat, we don’t have capitalism in America“. Such a shame that Mrs. Warren has no teeth in her current post. I suppose she’s too honest and sharp to be appointed to a position where she could have some impact.
• Loose money – How can we expect banks/lenders to act responsibly when the Fed shovels money to them at below-market rates? We can’t. Profiting from this spread is irresistible. It is inevitable that they will churn out bad loans. No amount of regulation can create artifically-stimulated, yet responsible lending.

This belief that a lack of regulation is solely to blame for this crash is becoming dangerously widespread. This Telegraph piece is another example. The author blames laissez-faire philosophies for the collapse of Lehman Brothers (LEHMQ.PK) and its aftershocks. What is it about moral hazards that these bank-apologists can’t understand? When you make risky loans, you should expect to take some losses. Yes, even if that means money-market funds are forced to break the buck. Spreading losses around only makes things worse, and basically stabs Adam Smith’s invisible hand with a rusty screwdriver.

Deregulation, or Decriminalization?

Like any good myth, there is some truth in the anti-free-market crowd’s argument – deregulation. But that word, deregulation, doesn’t describe what took place. Decriminalization is more accurate. Repealing Glass-Steagall, lowering bank reserve requirements to zero, increasing leverage, loose money, revolving doors.

Regulation hawks make many valid points. Clearly we need laws that outlaw reckless greed and fraud. Those who profited should have everything clawed back. But unless we stem the flow of cheap money and allow companies to fail, such regulation is pointless. Our first priority should be restoring some version of a free market.

Easy Money and Bailouts

Prior to the Great Depression, banks were forced to borrow money at above-market rates. Now we shovel it to them freely. Under the status quo, banks are practically ensured profitability, and bankers fat bonuses. This should come as no surprise, as bankers largely control the Federal Reserve.

It is critical that Americans realize the role our Central Bank plays in bubbles. Without Fed-provided liquidity, bubbles would be tame or non-existent. Growth would be smoother. Instead of dramatic cycles of boom/bust, we would see small fluctuations and stable growth. Deflation, the Fed’s worst nightmare, might even occur. But that would be a result of increased productivity, and wages would not necessarily follow. We would also escape rampant dollar destruction shown in the chart below.

These issues are nothing new. Thomas Jefferson fought against central banks and their loose-money policies almost 200 years ago.

No one has a natural right to the trade of a money lender, but he who has the money to lend. Let those then among us who have a moneyed capital and who prefer employing it in loans rather than otherwise, set up banks and give cash or national bills for the notes they discount.

Blame the Fed

While a responsible Fed is theoretically possible, we haven’t seen anything close since Paul Volcker left. For now, it is imperative that we stop blaming laissez-faire policies for our problems, and recognize the real causes of this crisis. Our economy is artificially stimulated, power-biased, corrupt, and manipulated. Almost nothing about it resembles true free-market capitalism. Spread the word. Until this is widely accepted, necessary economic change will never happen.

Disclosure: No positions in any companies mentioned.

Comments

[Tom E.:]

Actually Thomas Jefferson wanted to end the federal charter of the Bank of North America. The bank was the main break that prevented state banks from printing money at will (that and specie redemption). After the bank's demise on President Madison's watch, inflation increased through the War of 1812 and afterwards until the economy melted down in 1819, just like today.

Jefferson was a debtor, he favored easy money.

Sep 17 10:37 AM

[BRUCE E. W.:]

The ideology of "so-called" Free Market reactionary responses are always the same: it was never enough. The idea that somehow the corrections are cause is a twisted revisionary tactic that defies explanation. You sell an idea that can't possibly exist (brute nature is as close as you get to a free market) and then you blame the failure on not "trusting" it enough. Blame the victims, blame the "interference" and blame the messanger. When you are sending other people out to die, it is easy to pay the consequences. You present a "just trust me" attitude that has no substance. If you really think your so-called free market system would have worked out without accellerating the incindiary practices that started, flamed and fueled the fire...there are game models that could allow you to show the trajectories of the process.
History, however, has demonstrated over the past decades that the social and political cost of saving the market for the priviledge of a few, has been the loss of democracy and massive misery for the people who are sacrificed by the process. Writing down debt is one thing; writing down people is an entirely different matter. All too often the mathematics of the free market magicians reduce everything to an equilibrium scale in a zero sum game. There is no justice in that arrangement. Ane there is no redemption for of the your wild card promise of a utopian market... final solution.

Sep 17 11:34 AM

[kingaj12:]

Seems like you don't need the Fed -- until you really need someone to create a lot of liquidity in a hurry.

Ponzi investors need to pay for that liquidity backstop. Insurance premiums or haircuts related to the systemic cost of defaulting on their hugely leveraged bets might do the trick.

Sep 17 12:03 PM

[John Galt:]

Yeah it's the free markets fault. That's what the people who don't understand economics say.

It's the free market's fault even though
- we just had the government set the price and quantity of money ( and they did a horrible job at it). * This is the biggest factor of all as we just lived though one of the largest bubbles in human history.
- The government telling banks who to lend to ( Community reinvestment act). When subprime lending was picking up, the community organizers pushing for it were bragging that the banks were kicking and screaming NOT to do these sub prime loans. Whoops.
- The government promoted lending/fueling a housing bubble, through Freddy, Fannie, FHA etc.
- The government/Greenspan/B... put... We'll bail you out
- Strong government regulation SOX

Oh but if only these overpaid CEO's made less money, none of this ever would have happened? Don't get me wrong, a lot of these banks and homebuilders did do some dumb things and deserve to go out of business and have their assests taken over by new more competant leaders)( that's capitalism), but don't blame this on the free markets when that's not the case.

Sep 17 12:14 PM

[Roger Knights:]

"But that word, deregulation, doesn’t describe what took place. Decriminalization is more accurate."

Too big to jail.

Sep 17 12:35 PM

[Economic Ph...:]

Bravo...Free markets can't exist with a central bank.

Sep 17 12:36 PM

[nova:]

Socialism is a very attractive ideology since
- Politicians can stay in power indefinitely controlling economy and masses promising "equality" and "fairness" (there are always evil hard-working people making too much money and responsible for everybody else misery)
- The lazy and stupid masses are very happy that someone will "take care" of them (there is no need for personal responsibility and plenty opportunities to steal from the state)

Sep 17 12:39 PM

[CoffeeRampage:]

We have sure heard a lot about redistribution of wealth lately, especially as Obama brought it up during the 2008 Presidential Election when he told Joe the Plumber; "Let's spread the wealth around a little." It's talk like this, which scare folks that understand economics and governments. The phrases like "redistribute wealth" and "Spread the wealth around" are buzz phrases for socialism.

The biggest problem with all this is that our great nation and our success is based on Capitalism, not socialism. We became the greatest nation in the history of mankind because of our capitalistic mindset. Folks just do not understand what redistribution of wealth feels like.

Money is taken from you, it just disappears through taxes. Government becomes a modern day Robin Hood. What does it feel like? Do you know? Well, it feels just like the stock market crash when your retirement fund and 401k, your money is suddenly worth 20, 30, 40% less.

So, I'd like to ask all the citizens of the US a question; How did you like it? Did it make you feel good or did it scare the heck out of you, as you watched your money disappear? Well, the reason I ask, is we just had a huge change and re-distribution of wealth. "Now you see it, now you don't!"

What is rather amazing is that this latest crash hurt everyone, well, so, does socialism and so does any scheme which re-distributes wealth. Perhaps, the US citizens ought to consider such things before they fall for all this talk about bigger government, free health care and government give-aways. Please think on this.
----------------------...
Money is like muck, not good except it be spread.
www.topinvestingtips.com

Sep 17 02:01 PM

[Adam Sharp:]

Excellent points, Steve.

On Sep 17 09:04 AM Steve in Greensboro wrote:

> Thanks, Mr. Sharp, for a great article.
>
> I think there is are two additional categories of non-free-market
> structures imposed by the U.S government that merit inclusion in
> your list: 1) retirement Ponzi schemes including Social Security
> and Medicare and 2) redistributive taxation.
>
> Briefly, the government Ponzi schemes create the illusion that the
> individual does not need to provide for his own maintenance in retirement
> which hammers the savings rate, reducing capital accumulation, wage
> rates and general wealth of the U.S.
>
> Redistributive taxation creates the illusion that the individual
> can live at the expense of somebody else. Today, the top 5% of U.S.
> earners pay 60% of the income taxes and the bottom 75% pay 13%.
> Obama's healthcare program is another version of this. When men
> don't have to work to support themselves, they won't.
>
> Tocqueville hit the nail on the head: “The American Republic will
> endure, until politicians realize they can bribe the people with
> their own money."

Sep 17 03:20 PM

[HerrHansa:]

Freedom is the ability to succeed or fail.

Sep 17 03:39 PM

[timyrrh:]

Rarely has anything I've read in the past year made me feel good--but your concise arrows pointing exactly at the main forces in our economic farces made me sigh inwardly that there is hope for greater economic understanding of the media manipulated public.What kills me the most is the amount of "think tankers" who get quoted --give me a break --people who cant ride bikes --critiquing bike riders based on reading other peoples theories of riding bikes and their possible meanings and most likely destinations but using authoritative sounding English names as their references.Hope to find your other writings soon --Thanks T

Sep 17 03:51 PM

[woollyB:]

Quick, someone get this author a megaphone and media access. Nobody would listen but at least it would be good theater.

Sep 17 06:57 PM

[SeekingTruth:]

Adam,
Good work, and I couldn't agree more.
Have believed the same for years.

Sep 17 07:00 PM

[BRUCE E. W.:]

Thomas Jefferson fought against Central Banks...is totally misleading. It was not, afterall, the Federal Reserve system but a system based upon the Bank of Englnd. Secondly; he opposed it on constitutional grounds and his interests were in protecting Agrarian Interests against the manipulative exploits of big commercial enterprise and industrial interests with centralized power represented under Federalist power. But thirdly: his distinctions were clear in his statements:
www.freedomdomain.com/...

www.poemhunter.com/quo...

www.brainyquote.com/qu...
Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains.

(Thomas Jefferson (1743-1826), U.S. president. Letter, March 17, 1814. The Writings of Thomas Jefferson, vol. 9, ed. Paul L. Ford (1898).)
etext.virginia.edu/jef...

The Spirit of Commerce and Manufacturing
"I consider the class of artificers [i.e., manufacturers] as the panders of vice and the instruments by which the liberties of a country are generally overturned." --Thomas Jefferson to John Jay, 1785. ME 5:94, Papers 8:426

"I hope we shall... crush in its birth the aristocracy of our moneyed corporations, which dare already to challenge our government to a trial of strength and bid defiance to the laws of our country." --Thomas Jefferson to George Logan, 1816. FE 10:69

"The selfish spirit of commerce... knows no country, and feels no passion or principle but that of gain." --Thomas Jefferson to Larkin Smith, 1809. ME 12:272

"Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains." --Thomas Jefferson to Horatio G. Spafford, 1814. ME 14:119

"Corruption of morals... is the mark set.. .."Money and not morality is the principle of commerce and commercial nations... Justice, honor, faith, must yield to the necessity of keeping themselves in place. The question whether a measure is moral is never asked, but whether it will nourish the avarice of their merchants, or the piratical spirit of their navy, or produce any other effect which may strengthen them in their places... This is the true character of [such governments] in practice, however different [their] theory; and it presents the singular phenomenon of a nation, the individuals of which are as faithful to their private engagements and duties, as honorable, as worthy, as those of any nation on earth, and whose government is yet the most unprincipled [ever] known." --Thomas Jefferson to John Langdon, 1810. (*) ME 12:376

Apparently your revisionist history doesn't stand up to scrutiny and Jefferson certainly would have placed moral hazzards as a threat to free independent society; and certainly would have nver traded a free democratic society for a free market ideology.

Sep 17 11:26 PM

[johngonole:]

Bruce E. W. wrote, "Free markets don't work". But it took hime this huge paragraph to make that statement. Nothing in all those words amounted to anything else. No evidence, not even arguments to back up your belief. Adam Sharp's article is dead on. If you are trying to plan a business and interest rates are bouncing up and down like crazy how can you plan your business investments. Easy money allows too many start ups to find funding in crowded markets. I could go on and on about this. But money printing induced inflation causes businesses to mistake rising prices for increased demand. Only demand hasn't really increased only the amount of money.

Bruce E.W. rant only shows that he only has one singular thought without anything backing it up at all.


On Sep 17 11:34 AM BRUCE E. W. wrote:

> The ideology of "so-called" Free Market reactionary responses are
> always the same: it was never enough. The idea that somehow the corrections
> are cause is a twisted revisionary tactic that defies explanation.
> You sell an idea that can't possibly exist (brute nature is as close
> as you get to a free market) and then you blame the failure on not
> "trusting" it enough. Blame the victims, blame the "interference"
> and blame the messanger. When you are sending other people out to
> die, it is easy to pay the consequences. You present a "just trust
> me" attitude that has no substance. If you really think your so-called
> free market system would have worked out without accellerating the
> incindiary practices that started, flamed and fueled the fire...there
> are game models that could allow you to show the trajectories of
> the process.
> History, however, has demonstrated over the past decades that the
> social and political cost of saving the market for the priviledge
> of a few, has been the loss of democracy and massive misery for the
> people who are sacrificed by the process. Writing down debt is one
> thing; writing down people is an entirely different matter. All too
> often the mathematics of the free market magicians reduce everything
> to an equilibrium scale in a zero sum game. There is no justice in
> that arrangement. Ane there is no redemption for of the your wild
> card promise of a utopian market... final solution.

Sep 18 02:36 AM

[SlimJim:]

Life in the States is a Casino...Place your Bets...Your in a rigged game buddy whether you realize it are not...Have a drink that will be served by someone of smile and bosum...Smile at the camera as your actions are being recorded...Notice how most folks seem to be losing but walk away gentle like this was expected........Yeah!

Sep 18 09:24 AM

[Cyrus the G...:]

Wonderful article.

Sep 18 10:49 AM

[Jane:]

I also agree w/the author that this hasn't been a free market, and deregulation has turned into decriminalization. Big business, which normally cries, "Get big government out of our lives!" has turned 180 degrees to, "The government must bail out our big crooked companies!" People who are here reading articles such as this have a clue about what's going on. Sadly, many Americans never see articles like this. They are getting all their information from the big TV networks, which still hasn't truthfully addressed the housing bubble, the fraud, etc. Most Americans are still living in ignorance about what happened, and therefore most of them are apathetic about demanding REAL change.

Sep 19 08:02 AM

[BRUCE E. W.:]

Thanks for the challenge john; you sound like a nuts and bolts kind of guy. A real New Yorker/ talker. Unfortunately this is not a nuts and bolt crisis. It's top down; not bottom / up. I can't imagine that you realize that the US monetary process has been feeding the big financial corporations an ESCALATING amount of money supply all along on a regular basis pretty much right after Bush's second term as the lender of last resort. Cheap money was flushing into the financial services sector and fueled 187 Trillion Dollars worth of debt all spread out in dirivitives and locked up with insurance against losses. This was all under Chicago School monetary theory; supply side; trickle down...free market bullshit, and Lazy fairness (Laissez Faire doctrin/dogma ruled the roost)
I don't suppose that you realize that the Lasissez-Faire (literally do nothing to protect yourself) process of deregulation and escalated free market mumbojubo actually narrows the markets for the big players..to one very deep private pool....leaving guys like you to chew your cigars in disgust and point to the other side of the room with the words the BOSS LOVES to hear from all the brown noses? Make a big noise...noisey traders.
Free market ideology is not a free market as you think. It's a private market. Its not just casino capital, its big casino where only the high rollers get to market. You must think you mean FAIR market? Or maybe an OPEN market: subject to enforcement of fairness rules? Say it ain't so! Your messin with my Free Market religion now and the gods of finance might not like that!
This is Star Wars finance, john, with Flash transactions that steal your equilibrium models and give them back to you with Santa Claus at Christmas...only sorry John; not this year...again. You want to get some facts about the current process of monetizing debt and hyperinflation...look at your bills. Weren't you around when there was 20% inflation? Do you have any real expoerience ofr knowledge of what your repeating like a proud peakcock? Try reading these for your answers: Get some facts John, not a lot of slippy sloppy dictatition about your daily mechanized bureocracy!


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On Sep 18 02:36 AM johngonole wrote:

> Bruce E. W. wrote, "Free markets don't work". But it took hime this
> huge paragraph to make that statement. Nothing in all those words
> amounted to anything else. No evidence, not even arguments to back
> up your belief. Adam Sharp's article is dead on. If you are trying
> to plan a business and interest rates are bouncing up and down like
> crazy how can you plan your business investments. Easy money allows
> too many start ups to find funding in crowded markets. I could go
> on and on about this. But money printing induced inflation causes
> businesses to mistake rising prices for increased demand. Only demand
> hasn't really increased only the amount of money.
>
> Bruce E.W. shows that he only has one singular thought
and that is this John. I'm a born and bred New Yorker Too. And I won't sell out my democratic free society to Washington DC or Chicago Think Tanks or FRont Groups or stupid rapid fier Republican Thugs playing Heil Rush LImbaugh for a lousy slap on the back and a promise of your proven wrong free market mentality you've been seelin for the past 30 years. Is that enough explanation?

Sep 19 11:46 PM

[BRUCE E. W.:]

Today, real politik, finance mobilizes politics and politics mobilizes finance. Purpose and intentionality underscores the who, what, where, and why; while economists and business simply concerns itself with the “how” it is done.
When Nixon floated currency off the gold standard it was to essentially to restructure debt.(That particular debt was largely military and political). There were, at that time, assets grounding finance (capital / asset ratio). Vital interests were linked to those assets and the float was grounded by a substantive incentive of self preservation.
Today Finance has become like language itself, it is a “universal” contrivance to convey values that should exist, but are nearly irrational themselves. The practice of using slogans like "free" market and "socialism" and other semantically loaded terms that are only vaguely defined is more political and devicive then discriptive and comprehensive.
Apparently the monetary theories of the Chicago School are still being orchestrated and the economy is being split into a financial schism that is cataclysmic and soon to be irreversible. The oligarchy is stealing our economy and our future. It's a shame we don't have a Bastille to STORM; but I think I know where we might start:: online.wsj.com/public/... It appears that YOU are all being transformed into human cattle; oh I meant chattel; oh, jeez; I meant human capital. Financialization will be the downfall of not just this economy, but of the American Constitution itself. Americans have been shocked into believing that the financial trickle down is essential and are traumatized from acting responsibly
The specialized division of labor in this country has segmented Americans into gradient niches of complacency and outright submission. A servant class is emerging deeply indebted to a professional service economy that is closing the door...creating barriers to entry...to entire segments of the new privatized "ownership" Nation INC. Financialization is a transformation of private control over the entire currency process by an oligarchy that has syndicated the process of capture.
It is interesting to note that the "language" and "lexicon" of "economy" is completely different for the bottom 80% of the population who repeat crafted slogans that are preloaded with emotional explosives. Sustaining security and subsistence creats uncertainty and fear that is preyed upon and spiced with wishful thinking. These subsistence and survival levels of authentic "economy" do not actually exist for the upper tiers, its all done for them. If you look at a state like Florida, the economy is actually divided into halves; with two major segments subdivided into sectors. The so-called "Free market" is actually a matrix of markets some of which are highly privitized economies unto themselves. A Beverly Hills Economy with superstar children opening $200 hankercheif stores on Rodeo Drive America is leaching on the rudiments of a fiat currency system that is disconnected from the baseline demographic demands of everyday America and the prospects for their own children. Rodeo Drive America with its Beverly Hills Economy has plugged itself into Wall Street with Flash Technology that excludes chance and virtually eliminates the risk which saps your investments and basically captures the bloodstream of American industrial capital.This gets superimposed as "supply side" economics now in the Financial Services industries which has no intention of doing its job to distribute these working capital money supplies into everyday demographics where it will build support infrastructure for your children. Instead, its being pumped and dumped while your being worked and jerked to supply a sustained economy for the very rich and its private economy in the $ky.
There is nothing ...NOTHING wrong with wealth BUILDING... as long as it is open and transparent, but this system is very closed. Nothing wrong with wealth as long as it REMAINS LIQUID As part of a system that is nourishing SOLVENCY and its own social vitality and foundations. But this system is set up with more and more fortified (institutionalized) enclaves of special privilege that mimics the old tyranny of royalty in Europe. WE are, in effect, reestablishing an aristocracy of virtual domination by fiat and proxy...just what our forefathers escaped from in Europe. The dimensions of depravity are growing exponentially under this arrangement of rationalized and rationed prosperity. Another generation of doubling will require a subsistence base twice as large and yet it is being bankrupted and scavenged from the core in the name of embedded national catch phrases and associated membership emblems that typically shield the greed and unethical pursuit of unfettered corruption. The language of political brand is indoctrinated into false confidence. It swells the heads of addicted neophites as they beat their chests with addictive displays of virtual self-deluded sovereignty over the clarity and ease of their talking points. In reality, they are being conditioned, manipulated and taught to act out with a senseless herding chant which addicts them like a monkey on a nicotine machine. America is being bought and packaged and they are chanting like moonies in Grand Central to the tune of the Big Bosses Money machine.
Of course some people do propagate this bullshit rhetoric because they believe it will air well with big money and place them in a good light with the private wealth mannikins of power. Well for you all I can say is ...good luck with your Manchurian connections!

Sep 20 09:23 AM