Free Market Not To Blame
Walk on by, walk on through
Walk till you run
And don't look back
For here I am
--U2
In the witch hunt to assign blame for the current financial crisis, a growing collective claims that the causes relate to excesses inherent to free markets. Through this lens, unfettered markets are seen as fostering long cycles of greed and fear that manifest in massive booms and violent busts.
Such perspective is interesting, given that few of us have observed truly free markets in our lifetimes. The free market construct, by definition, engages buyers and sellers in voluntary exchange. Buyers and sellers trade for their own self-interest, and market participants are responsible for gain or loss associated with their actions. Outside entities generally do not intervene to mitigate market processes or outcomes.
In reality, modern markets feature a variety of interventionist measures such as price controls, taxes, and regulations. Market interventions are often rooted in times of crisis such as large bankruptcies or wars. Prone to rigid patterns of behavior during times of acute threat (Staw, Sandelands, & Dutton 1981), people are more likely to sacrifice freedom for security in the form of increased state control over markets during economic crises.
Over time, however, the state commonly converts event-driven interference into institutions that influence market behavior on a regular basis. The Federal Reserve, government sponsored enterprises such as Fannie Mae (FNM) and Freddie Mac (FRE), and the Federal Deposit Insurance Corporation exemplify institutions spawned from acute economic events but designed to routinely alter the course of market actions and outcomes.
As such, blaming recent credit turmoil on 'free markets' is nonsensical, since our markets have not been free for some time. The follow-on question is obvious:
"If free markets aren't at the root of the problem, then what has driven the extreme credit conditions at the epicenter of the current crisis?"
Although market interventions are often proposed as stabilizing measures, critical thinkers need to consider the role of interventionism in amplifying economic and market cycles.
References
Staw, B.M., Sandelands, L.E. & Dutton, J.E. 1981. Threat-rigidity effects in organizational behavior: A multi-level analysis. Administrative Science Quarterly, 26: 501-524.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2009 Minyanville Media, Inc. All Rights Reserved.
Many people don't necessarily change their behavior because of the threats, but they don't stand up and counteract the threats, either. They also don't think logically and thoroughly in times of threat. It doesn't matter if the threats are real or simply a disinformation campaign in order to present an atmosphere of panic in the media, even if the populous isn't really in a panic, this media atmosphere is now the representation of our nation.
Basic analysis will reveal that there is a fault in the free market system: as with any system to be reliable, it needs some kind of feedback mechanism to moderate its behavior. Now is the time to install those mechanisms, not exacerbate the free-running disassembly by stupidly pumping more energy into the system.
I support this approach; but the knee jerk reaction of the talking heads inside and outside the government are not encouraging people to look at problems differently.
Instead, people are willing to give up freedoms and are sold on the need to act quickly without regard to the law of unintended consequences.
Perhaps we should have taken our time and evaluated solutions carefully? Would the business cycle and health of our banking system really be any different today if we were actually in a healthy public debate instead of throwing rocks at each other as to whether the bailout will work? All the while changing the purported purpose of the bailout.
Since we're well along the path of possibly forever changing the way our fundamental economic and capital allocation systems work, wouldn't it be nice to discuss these issues in meaningful detail? I know if far eclipses what can be addressed in a Minyanville post, but I can't think of anything more important for citizens of this country to address.
Plainly free markets unlock the energies and passions of man for economic gain.
Just as plainly free markets have a long history of instability. The term Great Depression was only coined Great in light of the many depressions that preceded it.
To ignore this fact and assume otherwise to me seems unwise.
Of course intervention in free markets has many negative effects beyond the intended ones. I would count high on that list, that the controls, once established and codified become tools for purposes complete unintended by the initial intervention.
But in light of recent events, does it not now seem, that removal of depression era ban on investment banks entry into the housing market, while a return to more lazzi-fair approach to markets, also had unintended consequences?
You are absolutely right!
Free market advocates need to shine a light on the fraud represented by the CPI and GDP numbers. The CPI (and the evaluation of inflation) relates directly to GDP and, in turn, this relates directly to our national debt as a percentage of GDP and thus our ability to borrow.
You correctly point out the government's increasing share of GDP but perhaps even more important is the increasing share of GDP represented by 'financial services' and the decline of manufacturing.
When you examine these numbers in conjuction with our current account deficit you start to get an idea why this economic crisis is different and why it is a joke to discuss 'free markets' in such a rigged system.
Throwing more borrowed fiat currency at a problem caused by too much debt won't solve anything but neither will returning to a system built on lies that makes us feel good but just passes the costs for this illusion of prosperity on to future generations.
