Four Myths About the Free Market and Its 'Demise' 26 comments
Rick Newman
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Would the free market do it better?
That's one big sticking point for legislators opposed to a huge bailout bill to get the financial system back on track. Before the failure of President Bush's first $700 billion bailout bill on Monday, a memo urged 100 or so conservative Republicans to call for a "free-market alternative to the Treasury Department's proposal." Republican Rep. Mike Pence of Indiana, who voted against the bill, explains on his website that "renewing our belief in the power of the free market must be our guide" to a better solution.
Free markets sure sound good — after all, what's not to like, if they're "free"? But the pure and airy version of free markets that keeps showing up in speeches doesn't really resemble the way free markets work in reality. A few of the prevailing myths about free markets:
They're fair. The idea that supply and demand always achieve equilibrium, that sellers always find buyers, and that every good has a price makes it sound as if pure free-market mechanisms ensure fairness and decency. Not really. In true free markets, there are winners and losers, and the losers lose hard. The most efficient and ruthless companies drive others out of business. There's no guarantee of competition, and monopolies form. Prices rise. And the powerful tend to get more powerful. Consumers take what they can get.
They're unregulated. In theory, the less government regulation, the freer the market. But the economy we're used to has multiple layers of regulation that have formed over decades, with general approval from most corners of society. Teddy Roosevelt interfered in free markets by helping break up mammoth monopolies in the oil, railroad, and banking industries — to great popular appeal. After the Depression, we got bank deposit insurance and dozens of other free-market intrusions that most people still favor. The "free market" of just one year ago — before anybody was talking about a bailout — featured all manner of government intervention, from unemployment insurance to federal car-safety standards to an activist Federal Reserve able to pull various levers to keep the economy humming. So when people invoke the power of the free market, which free market are they talking about? The one of 150 years ago, with very few consumer protections? Or the one of a year ago, already heavily regulated?
They're efficient. When it comes to investing capital and running a business, yeah, it's likely that a company operating in accordance with the profit motive will spend its resources more wisely than a government bureaucracy answerable to politicians. But when problems develop across the whole system, markets tend to seize up. That's because all the players who behave rationally when protecting their own interests don't necessarily agree what's best for the whole system. In the current crisis, for instance, banks with money to lend are sitting on it instead, fearful that borrowers might default. And so far, no market mechanism has persuaded banks to start lending again for the good of the overall economy. Market solutions usually do emerge, but it can be bloody and destructive getting there, because every participant fights to get as much as it can for itself. For well over a century, the appeal of government intervention has been the Fed's ability to act as a mediator seeking the best solution for everybody, instead of simply letting various interests fight to the death.
They're cheap. Would a market solution to the financial crisis cost less than the $700 billion proposed in the failed bailout plan? If we truly had a free market, almost certainly not. Most economists agree that a pure market solution would allow hundreds of companies to fail, with no safety net for the suddenly unemployed, bank depositors, creditors, or anybody else brought down by widespread economic failure. That would probably kick off a second Great Depression, which is why there are virtually no free marketeers arguing that we should repeal layers of existing regulation and return to a truly unregulated market. Plus, with less regulation, there's a lot less for Congress to do.
Disclosure: No positions.
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This article has 26 comments:
Markets should be centrally controlled by Wall Street bankers, puppet media, puppet politicians, and socialist policy wonks.
It is government meddling in free markets that causes the very distortions that require the consequential corrections.
In a truly free-market, the only monopolies that exist are those that curry the favor of government intervention (see FNMA and FREDDIE MAC, FEDERAL RESERVE).
Free-markets are only free when they are free of government manipulation. Government manipulates free-markets with legislation and the Federal Reserve manipulates free markets by injecting counter-feit money at interest rate below free-market rates.
Such manipulation distorts the perfectly functioning organism we call the economy by distorting the imbalances between those that save and those that consume.
This bailout is nothing more than a continuation of policy maker's war against the eventual consequences of their policies of free-market intervention. Furthermore, it is a war against those in society that have chosen thrift and savings over consumption. The bailout is designed to manipulate us into more credit and consumption.
#3 They're the most efficient.
Markets fail. Governments fail. Which one corrects its mistakes faster? Which mistakes cost more? Let's compare subprime mortgages to the Great Leap Forward.
#4 The market isn't cheap, its accurate. If you lose money, you lose money.
America has an economy that is more free than Europe. Even after this drop, American wealth still exceeds that of Europe. If you look at the U.S. versus China or Russia, its obvious that the most expensive systems are the ones that impoverish their people, not those that are so wealthy they can lose the equivalent of a sub-continent's worth of GDP in a day and still be wealthier than most other countries on Earth.
Finally, there are free market safety nets, and they used to exist all over the United States before the government took over. But then, what good is a safety net when the government providing it is broke?
First of all, most economists agree that with the $700 billion bailout, hundreds of companies will be going bankrupt. In other words it isn't making a difference. More importantly, we're only going further down the road of what is seriously wrong with our economy. We are wrapping our arms around European solutions which haven't served them at all. European analysts are saying that their banks which are typically much larger on average, have gone the full 10 yards leveraging up their portfolio. We've been hearing that certain companies here in the U.S. are 'too big to fail', which doesn't mean they can't fail but rather we can't let them fail. The Europeans are saying that their banks are too big to save. The question as to why we haven't heard as much from them is they are much more effective at covering up their dismal balance sheets till its too late.
As for comparing to the great depression, we need to remember that over regulation is a large part of what brought on the great depression. This fix was still more regulation which didn't see us out of the great depression WW2 saw us out of the great depression.
I hear so much crap about this crisis is due to lack of regulation. Ironically, those who are saying that were the same ones that blocked reform and regulation, as this video will make clear.
www.youtube.com/watch?...
Are you kidding me? The Fed seeks the best solution for everybody? Really? Like protecting savers, retirees, the poor, and those who are prudent with their money?
The quality of life of most Americans is lower than it should be because of one organization: the Federal Reserve. Yet, somehow the author wants you to believe that it finds "the best solution" for everybody.
They're fair -- Markets are always fair because they do not exist unless there is a win-win exchange. No exchange takes place unless both parties perceive a benefit to the transaction.
They're unregulated. -- Your premise is sound. Governments do currently regulate financial markets. But it does not follow from this premise that more intervention/regulatio... is required. Given the crisis, the question that needs to be asked is whether there are problems with the current interventions by government.
They're efficient. -- The premise of free market theory is that voluntary exchanges of individual players reflect the interests of society as a whole -- the Invisible Hand. Inversely, if a voluntary exchanges do not take place, that means that the exchange would not benefit society. Government coerced or encouraged exchanges do not benefit society as a whole, but rather those who can persuade government to act on their behalf.
They're cheap. -- No one knows what will happen if the bailout does not occur. There is an equally speculative list of horrors that could result from intervention. History shows that markets, when permitted to exist, are efficient at reallocating capital. Business that do not add value are allowed to be destroyed, so capital can move to successful businesses and prudent managers. Good bankers will find jobs with stronger firms. And, FYI, academic consensus is that the Great Depression was a government failure, not a market failure.
BTW, there are lots of free marketers advocating no government regulation and stable currencies. You should check out the Von Mises Institute and the Cato Institute for starters.
For crissake... we wouldn't even HAVE this mess if we had a free market.
I suspect it can be proven that the free market is the most effective economic system there is. The question, though, is whether that's really what we're after. There are social, political, etc. realms that also exist in our world and they, too, will assert themselves.
The goal of the generally-free-sorta-r... markets we have now may be not so much the best possible economic system but the best possible balance of a variety of interests; economic and otherwise.
Perhaps this continual balancing and tuning is one of the reasons why our society has proven remarkably resilient over the generations, and why, even in our most heavily regulated phases, our economy was able to stay a heck of a lot more open than even the most liberal among socialist economies.
Rigid adherence to any sort of dogma, pro market or otherwise, is what might prove most dangerous. In this specific crisis, I hope the Feds do whatever has to be done, economic theory be dammed, to make sure damage to Joe Average is reasonably contained. Main Street hates, but has learned to live with layoffs, retraining, rising prices, falling prices, etc. But tampering with Joe average's notion of risk-free savings . . . we really don't want to mess with that (the crackpot looking for 10% on a money market fund is one thing; someone who assumed safety with a 1% money market fund better not be told "You lose!").
Actually, this isn't really all that alien to finance. So much of the theory we utilize depends on the existence of risk-free investing as a starting point. Taking that away puts everything back to square one; all economic theorists erase everything, pull out the classic utility functions, and start over.
We grew up with the notion that FDIC was enough to suffice. But that was set up a long time ago. We may need to modernize a bit.
An economy based on debt is viable.
100 percent ownership of all companies (profit making or not) by the government ?
I would argue that it would be of much more benefit to the average man this the current form of American socialism which is privitasation of profits and socializing losses.
In the current form, companies which would not otherwise survive are being kept alive using the average citizen's tax dollars -- money which could have been used to building schools, roads, providing social benefits.
Now what we see is the employees and the bosses (of the failed companies ) get to keep their jobs and investors are protected at the common man's expense.
This is an example of the well-off using the common citizen's wealth to pay for their mistakes.
Did you read the bailout? We are bailing out the foreign banks too.
I generally believe that the best solutions are those that will arise through the mechanisms of markets left alone to function as they will. That said, I'm keenly aware that the orderly functionining of free markets depends on both buyer and seller having access to the same information - i.e., transparency and accuracy in reporting.
It is incredibly easy to see that at least some of the foundation of today's challenges stem from a lack of transparency in credit markets in particular.
Regulations aren't the boogeyman here; lack of transparency is. Typically, the best (not the only, mind you, but the best) intentioned regulations work to promote and enforce transparency and fair reporting in markets so that buyers and sellers can more reasonably establish fair prices and so that trust, over time, is bulwarked.
There will never be a perfect balance of information between buyers and sellers, nor will their be a market perfectly free of government intrusion at some level, and I for one don't believe there should be. We should err on the side of less intrusion than more in my belief, and all of our efforts ought to be aimed at increasing transparency while limiting burdensome rules. That's the genesis of SANE regulation, which is what has been missing for some time now.
To be honest with you, after I read this I thought it was written by Alfred E. Newman, but I guess this one is by his brother Rick.
Let me just follow along the lines here of debtacid a moment... In regards to the puppet media... Rick, did you ever wonder why the *profession* of journalism has gone down the drain since the 1960'-70's? Let me express my opinion for you Rick...
When you write this story you end it with *Disclosure: No positions.*, but you fail to inform the readers of a minor detail here and there... Like where your bread and butter comes from... Isn't that a bit misleading?
You do disclose that you are the Chief Business Correspondent for U.S.News, but don't you think that it would be nice for everyone know that the guy who writes your paycheck is Mortimer Zuckerman, primary owner of Boston Properties, Inc?
So, Rick, it may be true that you have *no positions* in the legal sense, but I think a *professional journalist* should provide the reader with a bit more background on where the money for their home, car and family comes from.
Rick, I understand that the *profession* of journalism has no written or binding code of ethics universal to the profession. Is that true Rick?
People like you, Cramer, Matt Lauer and fools like Diane Sawer who prostitutes journalism to sell Hanna Montana for the Disney Corporation during Good Morning American really need to get your acts together and spend a bit of time writing out a binding professional code of ethics for journalists. When I see Matt Lauer hawking everything under the sun for the General Electric Corporation I find myself a bit ill.
The bottom line Rick is that the American people are catching on to your confidence games for major corporations and Wall Street. If this bill before Congress fails, Bush and Paulson tells me the sky will fall. What they aren't telling you is that if does pass, the sky will also fall. Just in different ways... In fact, if the bill does pass, I expect the future to be stark and brutal for some segments of our society.
Game over...
I want to point out the word value above. I have often wondered what value is created within our "trading" markets by the majority of investment firms and brokers? Value is tenuous thing. If my existence is created merely to "hold" paper, so that one business can take it from a the expense column and put it on the revenue column - then the value is limited in real market sense.
These troubled companies new what was going on - and if they didn't then they were too dumb to get a really smart person modeling the net affect in Excel. Either case, I say they made the bet, leave it on the table and see what happens. The credit crunch only affects people that need credit -- and maybe it's time to stop living our lives [top to bottom] on the promise of a dollar tomorrow.
Curbs-in Rick Newman
1 0
The so- called "bailout" (which isn't a bail out at all, rather it is a wealth transfer) is the price we are now being asked to pay for the "free market" in the housing industry over the last thirty years.
The terms "free market"; "bailout" and all the rest are what George Orwell referred to in 1984 as "doublespeak"; which he defined as, saying one thing and meaning exactly the opposite.
This is what federal officals and corporate criminals are doing when they keep prattling on about "free markets", "bailouts"; "credit crisis" and all the rest.
We don't have a "credit crisis" at the present time. The credit markets have corrected themselves nicely in the last 12 months as lenders finally woke up and realized they were going to have to stop lending money to borrowers who couldn't pay it back.
The "credit crisis" that exists in America and most of the industrialized world today is the fact that most individuals cannot survive without subsiding their earning capacity with borrowed money.
The fact that they must borrow money to survive, is the crisis; NOT the fact that there isn't any money available to borrow.
In fact every, single one of us is better off right now with no ability to borrow money, than we were 12 months ago when any one of us could have borrowed enough money to buy a house, whether we had the ability to pay it back or not.
Markets are not free and the fact is they never were. Most Americans would be far better off if they were citizens of any number of countries where they would have by birthright, access to health care; education; adequate disability and retirement funds; living wages and much better workplace regulations in favor of the worker; not the employer.
So what if the end result is that a Mercedes Benz costs $100,000 and a Chevrolet costs $20,000? There seem to be no shortage of buyers who prefer the Mercedes to the Chevy.
If the output of the free market is a Chevrolet and the output from a regulated market is a Mercedes or a Toyota, I'll take the regulated market any day!
"Why not not have communism ?
100 percent ownership of all companies (profit making or not) by the government ?
I would argue that it would be of much more benefit to the average man this the current form of American socialism which is privitasation of profits and socializing losses.
In the current form, companies which would not otherwise survive are being kept alive using the average citizen's tax dollars -- money which could have been used to building schools, roads, providing social benefits.
Now what we see is the employees and the bosses (of the failed companies ) get to keep their jobs and investors are protected at the common man's expense."
Ah yes, Chairman Mao, good choice! For one thing with a communist system, only your post would be available here, succeeding in your desire to be heard above the noise we otherwise create here together.
Funny enough, if Mao was alive he would agree with communism to control its citizens and restrict free thought and behavior, but he would disagree with you about the socializing the economy which is probably what you meant to support. In Mao's later years he realized the fallacy of your and his earlier idealism. He didn't make the necessary changes to the economy while he was alive but he did make his concerns clear to the next leadership. While we read today about how successful the new Chinese economy is, there are areas of failure. Their banking system is in shambles. They have plenty of government owned business all of which they are trying to sell off into private hands or dismantle without disturbing employment levels of the masses.
Its hilarious that you would speak of adopting that which they have and are continuing to throw out.
we HAVE access to healthcare, the gov. already pays for education, we have a joke with social security... and if you don't like your employer, the QUIT and go start your own company!
the fact is a chevy is more like 35k and it could be 20k if we didn't have union's jamming healthcare & pensions into the price of the car.
the problem in my country is not class warfare between the 'have' and 'have not's'
the problem is all too often the "do's and do not's"
Grow a sack, and make it happen. life's sucks.
you were one of those people standing on a rooftop awaiting government aid in New Orleans after Katrina.
I'm not waiting for Obama force 1 to fly over my house only to deliver me aid in the way of a 50lb. bag of dry rice from 5,000 feet!