Democrats & Liberals Archives

The Free Market

Political and economic leaders constantly extol the free market. Don’t depend on the government, they say, depend on the free market to do its magic. Regulation ruins the efficiency of free markets. Only when left alone will the free market live up to its extraordiary potential.

In the last 6 years the free market was left pretty much alone. Regulation has become a dirty word. As everybody knows by now the economy is not in good shape. So, did our financial managers leave the economy alone? Of course not. Here's what they did:

Earlier this week, the Treasury Department organized an unprecedented rescue plan for America's largest banks. The banks, most notably Citigroup but also Bank of America and Wachovia, got into big trouble by sponsoring more than $400 billion worth of "off-balance-sheet" affiliates to do highly speculative deals with borrowed money.

These bank affiliates bought a lot of high-yield assets backed by subprime loans, credit card debt, used car loans, and other risky debt. Now it's not clear what these investments are worth.

Citigroup's affiliates have exposure totaling at least $80 billion. The Treasury persuaded several other banks to put up a huge pool of capital that will promise to buy securities that markets may not want, in order to keep market confidence (and bank balance sheets) from collapsing. In effect, the Treasury just added another layer to what may be a house of cards.

Yes, indeed, we need free markets. Free markets work wonders for little guys. If a little guy makes a bad investment, he loses his investment. So what? If a big guy like Citigroup makes a bad investment, it may affect everybody. We bail it out. As Kuttner puts it:

So, consider: If you lose your job to outsourcing or your pension plan to an engineered company bankruptcy or your health coverage to a corporate takeover or your home to a subprime loan shark, hey - that's the free market working and the free market makes America great. Tough break.

But if you are Citigroup, and you just squandered billions of depositors' money on speculative bets that went bad, the whole economy will tank if you fail and the government will rush to your rescue.

What do our leaders mean by "free market"? The market is free to smack its hidden hand against the vast majority of Americans, but the hidden hand is stayed by the powerful whenever the super-wealthy do atrocious financial deals. Isn't it time to "enhance" the market with regulation to stay the hand of corrupt financial organizations? Then we may all consider ourselves to be free.

Posted by Paul Siegel at October 22, 2007 5:02 PM
Comments
Comment #236695
In the last 6 years the free market was left pretty much alone.

LOL. If by left alone you mean no NEW regulation was enacted, I might bite. But I have not seen a wholesale elimination of regulations as you are suggesting.

Free market my ass.

BTW, the example you provide has nothing to do with free markets, in fact it is a NON-free market that means we are trying to bail out Citigroup instead of letting the company fail (because it should if it is sepculating on seriously flawed financial deals) and sending a message to others to avoid them, we are keeping them around to continue their practices AND telling other companies to do the same.

You have to allow real failure to exist in order for people to have a chance to succeed. By removing one you eliminate the possibility of the other.

Which I believe is the real motivation behind the ‘progressive’ movement.

Posted by: Rhinehold at October 22, 2007 5:18 PM
Comment #236703

“I certainly think the free-market has failed” and “We’re going to take things away from you on behalf of the common good” and “We have to build a political consensus and that requires people to give up a little bit of their own…in order to create this common ground”, were all spoken by Hillary Clinton. Free markets work when there is not opressive government regulation. Hillary would have more of the government regulation and intervention that Paul writes about. How can a progressive liberal or anyone else vote for this ideology? It’s just one step short of socialism and nationalizing our biggest corporations. I agree with Mitt Romney’s characterization of Hillary during last nights debate. She has never run a corner store, city, state or business. Her lack of experience is troubling. She has also stated that she has a million ideas but American can’t afford them all. I say, America can’t afford any of the vote-buying schemes she has floated recently. A Hillary Clinton administration would be a series of failed liberal ideas thrown up in the wind to see which way they blow. No leadership here, just following the polls and popular opinion of the moment. Hell, a computer can do that type of leadership better and can be reprogramed when it fails…Hillary is stuck in the 60’s mentality of more government and less individual freedom.

Posted by: Jim at October 22, 2007 7:22 PM
Comment #236704

Paul et al
The problem with the banks is one of confidence,not one of default. What Treasury did was a move to restore a degree of confidence.That is what FDR meant when he famiously said,”We have nothing to fear but fear itself.”Beyond basic barter all economies depend on confidence. Money can not be eaten after all. Banking regulation serves to maintain that confidence. The problem occured when new regulation did not take place to cover new potential threats in changeing markets. This is not much different than the savings and loan debacle where regulations were actually lifted.Both problems occurred as a result of the bonehead ideaolgy of the “free marketers”. They are correct that over regulation can slow markets but they are wrong in assuming that even appropriate regulation should be avoided. Treasury is doing a good job at this point. Finally after seven years of hurtful policy Bushco has gotten rid of the Texas cronies(except Gates)and put the grownups in charge of many departments.Perhaps the cronies left because all the good looting opportunites have dried up. Damn Dem congress and their oversite.

Posted by: BillS at October 22, 2007 7:22 PM
Comment #236723

If you want to know how private companies do things, take a look at Iraq. These private companies that were given sweetheart deals to fix Iraq’s security and fight our wars for us, have instead bled us dry. The story of Iraq is the story of an incredibly corrupt set of “privateers” stealing taxpayer money. No one watched, no one regulated, and they behaved just as they do in that situation - they robbed us blind.

Posted by: Max at October 22, 2007 9:47 PM
Comment #236738

When you have an Administration who place loyality above ability and appoint “bone heads” in regulating agencies you have the fox guarding the hen house. The banking industry has again shot itself in the jewels but many of the top bankers made tons of money during the same peroid. These same people scream at the top of their lungs about giving aid to the poor but have their well manicured hands out for millions of tax dollars.

Posted by: C.T. Rich at October 22, 2007 11:02 PM
Comment #236740

Except for pretty radical libertarian-types, I don’t know of anybody who actually argues for a totally “free market.” As Rhinehold points out, these bail-outs of banks have nothing to do with totally free markets.

Unfortunately, however, as much I sympathize with the idea that banks should suffer the same consequences as individuals for making bad economic choices, letting the banks fail is not a realistic option. Yes, the managers might get a deserved comeuppance, but the major damage would be done to all of us little guys.

All of that money invested by the banks belongs to who, after all? To the banks? Not exactly. It belongs to all of us with retirement plans, savings accounts, etc. That’s OUR money, and we’re the ones being bailed out.

Unfortunately, there are some sectors of the economy that simply can’t be allowed to fail, no matter how poorly they’re managed, and there’s no indication or history which demonstrates that government could ever manage them any better. It’s kind of agriculture or the airlines. Our economy depends on these industries and letting them collapse is just not an option.

Posted by: Loyal Opposition at October 22, 2007 11:11 PM
Comment #236760

Paul- Would it seem as though we have a reincarnate, of the want a Be, Republican Robber Barron’s
of eighty or so years ago? Seems as though we
are about to see history repeat it self.

Posted by: -DAVID- at October 23, 2007 2:29 AM
Comment #236762

Rhinehold said: “You have to allow real failure to exist in order for people to have a chance to succeed.”

Into this comment I read, “One has to be very cold and heartless and without compassion to stand by and do nothing while thousands or even millions of fellow citizens lose jobs, homes, medical insurance, and savings, when the power of intervention to avert such losses exists. And in this case the power to intervene and prevent such losses did exist.

The Federal Reserve and the Treasury were right to step in to salvage the situation. And you are right, Rhinehold, this is regulation for the benefit of the general welfare of America, which is after all, a collection of people within geographic boundaries.

Failure resulting from personal inadequacies should not warrant tax dollar salvation. Failure as a result of changing economic conditions or political policies SHOULD warrant public assistance. Greed motivated CitiBank and BofA and many others to take risks with money which was never theirs to begin with, but, entrusted to them by investors and depositors. Their greed warrants the decision makers coming under much closer scrutiny as to how they handle other peoples assets and liabilities. But, to allow them to fail, causing countless other financial failures by innocent persons not party to the risk taking decisions, would be heartless and cruel by any common ethical standard. Not to mention the chilling and dampening effect it would have on investors and savers against putting up money for investments again.

From the 1930’s through the 1960’s large numbers of people still refused to put their money in banks or investment accounts, preferring mattresses, and secret compartments in floors and attics instead. That is the diminishing effect on capital formation that would occur if Citi and BofA and CountryWide and others were allowed to fail. The economic repercussions for 10’s of millions if not a 100 million Americans present and future would be very negative, indeed.

Hence the need for both the bailouts and greater oversight and regulation to insure another such bailout is not required in the future. Paul is right that the Bush administration has abdicated its oversight and regulatory roles in part and has created a number of potential economic bubbles born of greed and risk taking.

Allowing a plethora of credit card companies to issue 28 to 32% interest rate credit cards to “higher risk” borrowers is another financial crisis in the making thanks in part to the Bush administration and Republican Congress which refused to regulate such usery by lenders. A great number of those so called “higher risk” credit card holders have never missed payments and have no defaults, were issued low interest rate cards which evolved to higher rate accounts by small increments despite impeccable payment records.

The end result is that these credit card holders would have continued to make timely payments at 12 or 14%, and never would have maxed out the credit limits, but who now face very difficult monthly payments driven up far in excess of what they budgeted at 12 or 14% causing them to max out the limits by the budget busting incremental increases in interest rates to as much as 32%. And it all took place under the rubric of something called a FICA score controlled by the very interests issuing the credit cards and holding these accounts.

Regulation is essential because corporate and investor greed will not be restrained otherwise. Greed is sole motivator for investors and corporations dealing in financial services. I don’t know about you, but, I have never met a greedy person who said “I have enough, don’t offer me anymore”.

Posted by: David R. Remer at October 23, 2007 5:35 AM
Comment #236765

We need a fair market, not a free market…

Posted by: Rachel at October 23, 2007 8:32 AM
Comment #236769
Into this comment I read

Of course you do, because it fits into your preconceived notions and biases. It has not basis in reality but why let that stop you, right?

Posted by: Rhinehold at October 23, 2007 9:29 AM
Comment #236770
But, to allow them to fail, causing countless other financial failures by innocent persons not party to the risk taking decisions, would be heartless and cruel by any common ethical standard. Not to mention the chilling and dampening effect it would have on investors and savers against putting up money for investments again.

Are you telling me that there is NO way to let Citibank fail but find a way to bail out the investors in a way that does not destroy them? That we can’t make sure that the company pays for its failures or be forced out of business?

I really thought that we had some smart people living in this country, unfortunately not.

But, since I’m a heartless bastard, what do I know, right? Hell, I’ll just start raising my children that way too, let them do whatever they want without letting them fail or incur any penalties for their bad decisions, it’ll all work out in the end…

Posted by: Rhinehold at October 23, 2007 9:32 AM
Comment #236773

Max-

The story of Iraq is the story of an incredibly corrupt set of “privateers” stealing taxpayer money. No one watched, no one regulated, and they behaved just as they do in that situation - they robbed us blind.

No one watched? No one regulated? Are you aware how Federal procurement is handled in this country? The Federal Acquisition Regulations? The Inspector General’s office? The Defense Contract Management Agency (DCMA) or the Defense Contract Audit Agency (DCAA)? The hundreds of thousands of Federal employees who administer procurement and insure compliance to the regulations everyday? I’m sorry but Federal procurement is the most regulated purchasing system in the world; it’s controlled by the awarding agency, codified in our laws and overseen by these other agencies that are designed to protect the taxpayer’s interest. It’s regulated to the point where it is also the most inefficient and most expensive method of procurement, and good contractors with even better lawyers can put most if not all of their risk back on the government. But that doesn’t mean it’s not regulated or watched.


Posted by: George in SC at October 23, 2007 10:24 AM
Comment #236792


Regulation is meaningless when cronyism reigns supreme.

Posted by: jlw at October 23, 2007 3:12 PM
Comment #236793

If there is such wonderful regulation going on, why did I hear this morning, it will probably take five years to determine where 2 billion dollars went that was to be used to train Iraqi police?

Posted by: jackp at October 23, 2007 3:43 PM
Comment #236794

jackp, haven’t you heard? There are no Iraqi police, only insurgent militia in uniforms. As for the 2 billion, there is no point in looking for light in a black hole. There’s a real good point to voting out incumbent politicians responsible for negligence and lack of oversight and accountability for your and my tax dollars.

Posted by: David R. Remer at October 23, 2007 3:47 PM
Comment #236796

Rhinehold, I will repeat myself: “Failure resulting from personal inadequacies [in judgment] should not warrant tax dollar salvation. Failure as a result of changing economic conditions or political policies SHOULD warrant public assistance.”

Posted by: David R. Remer at October 23, 2007 3:51 PM
Comment #236798

Somewhat off target, but still relevant, is this commentary from David Stockman, the architect of Reagan’s tax-cutting policy. In it, he repudiates the myth that tax cuts for the rich are good for the economy, using data from the very policies he advocated. They were wrong by $2 TRILLION. So for you deluded conservatives who still think Reagan was good for the country, read it and weep.

Posted by: mental wimp at October 23, 2007 4:56 PM
Comment #236799

Regulation is essential because corporate and investor greed will not be restrained otherwise. Greed is sole motivator for investors and corporations dealing in financial services. I don’t know about you, but, I have never met a greedy person who said “I have enough, don’t offer me anymore”. Posted by: David R. Remer at October 23, 2007 05:35 AM

David, I think that many of you are mistaking “greed” for profit. Are you saying that making a profit on your business is the same as greed? If not, define what amount of profit does not exceed the greed threshold. Your personal observation about never meeting a greedy person who has enough belies the definition of greedy. If one says they have enough they would not be greedy! If they are greedy, how would you meet one who has enough? You may wish to rethink that statement.

Posted by: Jim at October 23, 2007 5:00 PM
Comment #236801

What’s wrong with being greedy? I’m greedy. I want ALL I can get and work very hard to get it. What’s wrong with that?

Posted by: tomd at October 23, 2007 5:12 PM
Comment #236804

Paul

Isn’t it time to “enhance” the market with regulation to stay the hand of corrupt financial organizations? Then we may all consider ourselves to be free.

There is indeed a double standard in this country. If you are monetarily powerful you are no longer subject to accountability. You now have free reign to use anyone and everyone as you see fit. When you fail the only ones who suffer are those you used to gain your riches. After all the system is such that you can not be allowed to fail. The rich simply use our tax dollars to cover their asses. In essence there is no longer any risk for the wealthy. They are rescued at our expense while we get to count our losses, get up and start over, often times with nothing. Of course all this lends credence to the suggestion that the wealthy now write the rules, dictate the laws and determine accountability. We are rapidly becoming a free market society with a different set of standards for the individual classes. I guess if you are wealthy, have all the cards stacked in your favor, and are enjoying your right to manipulate people and the markets at will then regulation is not something you would see as a plus. But for the rest of us lower class peons it is a necessary means to a little parity.

God forbid the wealthy should have to live by the same standards as the rest of us. What are you thinking Paul?

Posted by: RickIL at October 23, 2007 6:12 PM
Comment #236834

I have to marvel at the blindness of people who can’t recognize that in every instance of “failure” by the free market they noted, the interferance of the hand of government was not only present all along it was anticipated all along. Rhinehold is right. Failure is a feature of a free market. These corrupt events were possible because the institutions could anticipate that the government would not allow a failure.

By the way, the failure of a bank does not mean the customers of that thrift lose their money, only that the SHAREHOLDERS do so.

When government and companies become partners, something darkly akin to Facism, we get the perfect storm of corruption.

Posted by: Lee Jamison at October 24, 2007 12:30 PM
Comment #236860

tomd, read Adam Smith to understand what the difference between greedy and enlightened self-interest. It would be illuminating. Greedy costs everyone, including the greedy in the long run. See Savings & Loan debacle for example. Enlightened self-interest motivates better and more for everyone matching one’s interest. The difference is huge and stark, and enlightened self-interest as opposed to greed is what the founding fathers sought when they issued suffrage to only white, male, landowners, who were most likely to be literate, vested in the goings on of society and government, and motivated to respond appropriately, not just for themselves, but, for their communities and nation as a whole for they knew their personal fate rested with the fate of the nation. A revolutionary war has that effect on people, don’t you know?

Posted by: David R. Remer at October 24, 2007 3:13 PM
Comment #236950

All you free-market, de-reg people make me laugh.
What a joke!
Free-market Deregu has been shown to be a failure so many times, but you still beat that dead horse.

Look to South America for free-market, dereg results — especially where the Oil Companies have totally free reign.
People in squalor, the environment RUINED, shoddy, fatal workmanship — acres of fetid oil residue pools, dying wildlife, sick, diseased inhabitants — yea, that is a utopia to dream about!!
Dereg working, yea, anybody remember Regan’s wonderful dereg of the Savings and Loan industry and the resulting mad stampede of corruption, greed and scandal????

To the people that rail against “unnecessary regulation” — regulation ALWAYS comes about AFTER it has been shown that left on their own, any industry/business — or even individual will do crap that harms others
in the beginning of the aviation industry, there were no pilots licenses, no regulations for aircraft, nothing, — Until people started dying

Robber Barons, Ohio River on fire — Superfund Sites — THESE are the wonderful results of deregulation and “Free Market”
Shut up!!!

Posted by: Russ at October 25, 2007 3:45 PM
Comment #236975

Russ- Right on, I remember the Cachagua River when

it caught fire. Quiet an unbelievable sight, an

when raw sewage flowed directly into the Rivers,

then into the Great Lakes along with oil spills

from refineries, all done with impunity until

Regulations were imposed.

Posted by: -DAVID- at October 25, 2007 10:12 PM
Comment #236976

————

——Sorry, the above post is about the River
which flows in Cleveland, Ohio.
-

Posted by: -DAVID- at October 25, 2007 10:18 PM
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