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The Problem with Unregulated Free Markets

Greenspan Concedes Error on Regulation

But in a tense exchange with Representative Henry A. Waxman, the California Democrat who is chairman of the committee, Mr. Greenspan conceded a more serious flaw in his own philosophy that unfettered free markets sit at the root of a superior economy.

"I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms," Mr. Greenspan said.

Referring to his free-market ideology, Mr. Greenspan added: "I have found a flaw. I don't know how significant or permanent it is. But I have been very distressed by that fact."

Mr. Waxman pressed the former Fed chair to clarify his words. "In other words, you found that your view of the world, your ideology, was not right, it was not working," Mr. Waxman said.

"Absolutely, precisely," Mr. Greenspan replied. "You know, that's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well."


 

Comments

I've been reading this blog off an on for awhile now, agreeing with somethings, disagreeing with other. Free country (one hopes) and all that. But I feel the need to say something here.

The message of this article is downright dangerous. Free markets work. They work wonderfully. But what one has to realize, is that we haven't actually had a free market in the longest time. Government intervention to push homeownership and the government's removal of risk from the equation (GSEs) is what caused the mess we're in now.

There is no problem being exposed of the free market because the market was never free in the first place. All the bankers who should be losing everything are instead being bailed out, which is precisely what they expected when they took such fantastic risks in the first place. Thanks, Government intervention!

Even Hugo Chavez has praised Bush for now standing to the Left of him. Everyone who thinks the Bush administration or even Republicans in general are in any way "right wing" or conservative should know better by now.

In a free market, the financial institutions who made bad decisions would be left to fall, and those who did not would prosper in thier wake, and Main Street would never have been touched.

Not being an area I have any kind of expertise in, I just want to ask - are you saying "main street" (how I hate that term but it is useful for now) would not have suffered while the financial institutions failed? Is that true?

One thing I have done is work at a couple of start-ups with incompetent CEOs and sometimes the Board, too (sometimes it isn't true incompetence - it's actually greed). Everyone suffered as a result of the decisions made at the top - the CEOs least of all because, they were paid amazing salaries, had nice exit packages (if they timed it well - right before the fall) and, at a certain level to a certain type of personality, there is a fail-upwards standard that George W. is part of. In my experience - but, again, you guys can tell me how different it is in banking - bad top level positions end up hurting everyone but the most vulnerable are the ones at the bottom.

And, it seems to me this domino effect around the world would not have improved without the bailout? Again, I don't know. And how will they lose everything? Reminds me of Lay's wife wanting sympathy when they were selling off most of their 15 homes - not at a loss, of course, while people had truly lost all the money they had saved.

I don't know if free markets work or not but I don't think bankers' expectation of suffering if they do it wrong is a helpful deterrent to everyone else that has no say in the matter - but goes down just the same.

Again, not ALL of the financial institutions are set to fail. Phrasing things like that is simply drinking the kool-aid of people who assuredly do not have your best interests at heart. There are plenty of healthy banks out there that people can do business with in order to keep the goods flowing in our "just in time" supply chain.

The market correction which would have taken place had the government done nothing at all would have resembled the recession (some say depression) of 1921. You know, the one no one remembers because it only lasted a few months. Precisely because the government did nothing about it.

What the bailout and all this talk about fundamentally restructuring our ecomonic policy will do is simply drawing out the pain trying to stave of the inevitable in futility. Such that resultant econmic woes will instead resemble the Great Depression of the 1930s, which everyone does remember, because it lasted for years and years thanks to government intervention (price controls, inflation, and drastically overpowered unions).

Bullshit,

Strong unions did not create the great depression. The era of the mega wealthy robber barons did. They sucked the money out of the market and the economy got top heavy. Markets have expanded but are doing the same thing again. The greed and fraud of the banking industry is just the first crack in a damn built on the delusion of infinite growth.

I really need to refresh my browser periodically - I'll leave a page up and all these comments come in - better than mine - and I'm still commenting away on something I don't think has been answered... That is going to be one of my resolutions when Obama is voted in....(I'm starting to believe the lead will be too big to fix the election...)

The Federal Reserve "caused" the Great Depression. It was the knee-jerk policies enacted which made it last as long as it did.

http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx

This sounds like a theory for why it was prolonged.

But the wiki article doesn't even mention the term "knee-jerk policies", and how can a theory be valid if no one has put it on Wiki yet?

http://en.wikipedia.org/wiki/Great_Depression#Causes

Failing banks are listed. SO is wealth inequity.

Did it sound like I was saying all the financial institutions - I meant the failing ones.

I'm sorry - I don't really think 1921 would be analogous to today - the economic environment is completely different and I think you're stating as facts things open to debate. I think I could as easily say if things had been taken care of differently in 21 - 29 would not have happened. I was just curious how you thought main street people would not be affected by what is going on if there hadn't been a bailout.

As far as the unions, along with the G.I. Bill, they did help build America's middle class. Living in LA a lot of my life, I know some entertainment unions have become ridiculous (for one) but they didn't start out overpowered.

BTW - I so agree Bush is not a conservative. From day one he wasn't.

We have yet to see what affect the bailout will actually have. The only impact its had is banks have held onto thier toxic assets instead of cutting thier losses in the hopes of getting a sweet deal from King Paulson. So far the $700 bailout promise has only made things worse.

The only thing that really amuses me about the whole thing, is Republicans have spent 8 years consolidating as much power into the executive branch as they could, creating an Imperial Presidency that looks like it could be handed to Obama. Too funny.

Free markets work.

Except...ummm...right now. "Free market" economics is failing in nearly every "free market" country of the world, and quite miserably I might add. Wait about 6-8 months when the real economies of these countries really experience the pain of their economic collapse in terms of job losses, business failures, and more of their citizens entering the poverty rolls.

But what one has to realize, is that we haven't actually had a free market in the longest time.

Okay, let's afford you a little latitude with this loopy logic of yours, just for the sake of trying to be fair to you: please explain, in detail, and with supporting facts, just when, exactly, did we ever have this long-lost "free market" for which you lament here? Do you mean before the Great Depression of the 1930s, perhaps? Certainly not from the end of WW II to the late 70s, which was definitely the era of extensive government regulation and demand-side Keynsian economics and was, in real terms, the best years of economic growth and equity in America when measured on all indicators.

Since Reagan was elected in 1980, and until recently, we've had about as "free" a free market as we've ever had. I could list all the deregulation laws, progressive tax rollbacks, New Deal and Great Society social program cutting, trade barrier lifting, and whatnot since Reagan was elected that made the markets more "free," but obviously, based on your comments already, you don't seem too receptive to reality or fact-based argumentation, so let's not waste any more of my or your time.

Government intervention to push homeownership and the government's removal of risk from the equation (GSEs) is what caused the mess we're in now.

Further proof you're either incredibly stupid or just plain gullible to current right-wing propaganda. What caused this current economic collapse was unregulated and insane investment vehicles like credit default swaps and other derivative-based free market "betting" schemes, and especially those backed by nearly 20 or 30 to 1 debt to capital financing.

When these bets turned sour, investment firms lost their asses and were holding notes that not only weren't worth a damn (or at least not worth what they paid for them), but furthermore they owed tens of billions on them that they didn't have. Bad mortgages on their own would never have caused all this. The nearly $50-trillion derivatives market caused it when the bills all came due and no one could pay them and no one would lend anyone else any more money to dig themselves out of their mountains of debt. Bad mortgages contributed to the crisis, but they weren't the real bugaboo.

Everyone who thinks the Bush administration or even Republicans in general are in any way "right wing" or conservative should know better by now.

I do know better. Let's toss economics out of it, just for fun, and examine the Bushies and Republican's current stance on foreign policy, civil liberties, social issues, and other such measures of ideology. Based on all that, they are ultra-right-wing nut jobs. On the crazy far-right-wing scale, they are ever-so-slightly to the left of Augusto Pinochet, and maybe a few inches to the left of Chun Doo Hwan or Benito Mussolini, but, hey, let’s not get too picky here. But I thank you for letting me clarify this for you.

In a free market, the financial institutions who made bad decisions would be left to fall, and those who did not would prosper in their [sic] wake, and Main Street would never have been touched.

Further moron logic. If this mess is left to its own accord, tens of millions of Main Streeters will lose their jobs, and hence their health care coverage, while tens of millions more will not be able to get even simple credit to buy homes, cars, or commercial paper to finance small businesses.

Oh, but other than that, we'll all be just dandy. Even with massive government intervention and stimulus packages, we’re still going to see some real suffering from all this. When that happens I invite you back to this forum so you can come up with some even loonier positions and present further “facts” to support such nuttiness.

Holy shit, Norm, the trolls around here get dumber and crazier every time I visit.

Ahh, insults. But unlike many of your predecessors, this tirade almost had factual evidence backing it up.

Government intervention to push homeownership and the government's removal of risk from the equation (GSEs) is what caused the mess we're in now.

Further proof you're either incredibly stupid or just plain gullible to current right-wing propaganda. What caused this current economic collapse was unregulated and insane investment vehicles like credit default swaps and other derivative-based free market "betting" schemes, and especially those backed by nearly 20 or 30 to 1 debt to capital financing.

Seems like you're the type who knows how to do homework. It seems that there's a chance you may know what a credit default swap actually is rather than just parroting something you may have heard somewhere....

Credit default swaps are basically insurance on an asset, and the market for said swaps boomed due to skyrocketing trading and investment in mortgage backed securities, and the whole market meltdown begain once people couldn't make their monthly payments thanks to "creative financing" aggressively pushed, originally by the Clinton Administration and whole heartedly back by just about every federal official up until recently: http://www.criterioneconomics.com/docs/20080226%20Market%20Commentary.pdf

...causing the securities upon which banks were speculating so heavily to suddenly lose value, leaving the insurers with astronomical bills they thought they'd never have to pay because houses were supposed to be the safest asset out there.

The bloating of the CDS market was caused by a housing bubble of skyrocketing housing prices. The meltdown of the CDS market was caused by the sudden drop in home values due to economic gravity that people seem to keep forgetting about for some reason.

Either way you slice it, home values lie at the core of the problem. And home values were artifically inflated far beyond what their actual market value should have been as a direct consequence of government intervention, pushing banks to loan recklessly and making money excessively cheap.

Now, I hope everyone here is done making a fool out of themselves going on about how I just "don't get it" and whatnot without any actual evidence supporting their position.

I've made several statements that I've substantiated with things known as 'actual facts'.

1) The Great Depression was prolonged unnecessarily through government programs intended to remedy it. I supported this with a detailed article which outlined the finding of a pair of UCLA economists who actually sat down and crunched the numbers instead of kissing FDR's ass.

2) I've pointed out that the credit market was never frozen, and hence the threats to Main Street, is it were, was a boogeyman sent to scare you. Again, I supported this with actual facts, linking to a site which compiled actual commerical lending amounts in the country which showed there was no credit freeze.

3) And above, regarding the housing bubble, I've given solid evidence that it was a government creation.

In return I get called names by a few adolescents and vague accusations of being just... just wrong, somehow, in some mysterious fashion.

I also get accused of being some fundamentalist, free market purist... in spite of my stating, in very plain english:

If we were talking about murderous, life-crushing sweatshops in this country (e.g., Upton Sinclair's Jungle), I'd be more sympathetic to government intervention. But that's simply not the case with the finance industry.

I present arguments, I support them with evidence, I try to be civil, and... I get called a troll.

Amazing.

I think the link to the UCLA researchers was very interesting. I don't think you're a troll.

1) The Great Depression was prolonged unnecessarily through government programs intended to remedy it. I supported this with a detailed article which outlined the finding of a pair of UCLA economists who actually sat down and crunched the numbers instead of kissing FDR's ass.

Wow, you found 2 people, who just happen to be trickle-down Freedman style neoliberal economists to believe that gasp government spending is bad.

One of those two professors wrote, as of 3 weeks ago...

And there is a real danger that even a moderate recession, along with the current perception of an economic crisis, would lead to calls from various quarters for bad economic policies -- policies that tend to either pander to special-interest groups, benefiting relatively few at the expense of many, or raising taxes, particularly on the nation's most productive citizens, many of whom create jobs through their own enterprises.

So, someone who thinks that people who make over $250,000 are "the most productive citizens" is clearly right, as you see it.

The other UCLA professor has written articles in the past about how Latin America has again gasp not been as productive as America. Of course, making no mention of the ditatorial free-market regimes that lead some of those countries.

And above, regarding the housing bubble, I've given solid evidence that it was a government creation.

Yes, the housing bubble was aided by the government, but that alone would not have caused a worldwide crash as it is now. The CDS that you describe as "caused by a housing bubble of skyrocketing housing prices. The meltdown of the CDS market was caused by the sudden drop in home values".

You strangely neglect the fact that people had CDS's taken out against securities THEY DIDN'T EVEN OWN. That, good friend, is gambling that these mortgages were going to fail. It's only life insurance if you take it out on your own life, otherwise, take it to vegas.

I'm Sorry, but if you fail to see how that omission of information is misunderstanding the problem, I can see how you sound trollish. If these securities of Bad mortgages were failing all of the sudden, the only people who should be hurting are the investors who owned the securities. Your free market created the CDS

I'm Sorry, but if you fail to see how that omission of information is misunderstanding the problem, I can see how you sound trollish. If these securities of Bad mortgages were failing all of the sudden, the only people who should be hurting are the investors who owned the securities. Your free market created the CDS

That's fine. I accept that. But what I'm arguing is that were it not for the artificial inflating of the housing markets, we could still have a CDS market going and no one would be complaining about it.

If the CDS market alone were the root cause of all the commontion, you could sell me on the need to regulate that particular market.

I want to be clear that I'm not a "free market purist". No one is, otherwise murder would be a service in a competitive market for human liquidation. I do however see Hayek as being far more grounded in reality then Keynes ever was.

Its all a matter of where one draws the line.

Saying "Free Markets work" is every bit as silly as Saying "Free Markets don't work"

Free markets do some things great, they harness human ingenuity and labor to produce incredible growth and production.

They also do some things incredibly badly, like healthcare and supply the other basic needs of those without enormous production potential. And they deal very badly with mass devaulaiton. like when steam and horse powered technology became obsolete and oil and steel based technologies replaced them.

Guess what, in the next 20 years oil burning technologies are about to become worthless. THe Free market is going to handle that very badly, it already is.

All the bankers who should be losing everything are instead being bailed out,

Also, the banking industry is central to our economy, if we had just allowed them to all collapse the credit market would have put a pretty dire choke hold on our economy.

But I agree, subsidizing business doesn't make our economy stronger. Although I find the argument that "Free markets don't cause collapse, greed causes collapse" is akin to saying "guns don't kill people."

true, and that is why we have laws against murder, and used to have banking regulation (that was oddly created after the depression)

Did Greenspan study the great depression in those 40 years? A smart cookie, but still! He reminds me of people who argue that communism works, but only as long as you take human greed out of the equation.

Any society that ignores human nature is doomed to failure, capitalist, socialist, whatever.

Thing is though, the banking industry, as a whole, was never in any danger. Not ALL banks were about to go under, just the highly leveraged ones. That's the part a lot of people are missing. There was never a catastrophic credit crunch. That was an outright lie perpetrated by Paulson and Co.

If we didn't have history as a guide to show the inevitable outcome of violent revolution (namely, a violent ruling party that is worse than thier decadent predecessors), I'd be out building a guillotine right now.

But the best I can do right now is vote as intelligently as I can and try to point out that critisism of the free market is misdirected regarding the current financial crisis.

If we were talking about murderous, life-crushing sweatshops in this country (e.g., Upton Sinclair's Jungle), I'd be more sympathetic to government intervention. But that's simply not the case with the finance industry.

But that's simply not the case with the finance industry.

Well their are plenty of people losing their homes and jobs. Food and fuel are rising over the long term, so there are reall repercussions for real people in this

But no doubt the current bailout props up a bad system rather then fixing any problems.

I find the concept of free markets a muddy one, filled with contradictions.

The wikipedia article on free market starts with: "A free market is a market in which property rights are voluntarily exchanged at a price arranged completely by the mutual consent of sellers and buyers."

What is a seller and a buyer? This agent could be a person, but it could also be a group of people, in which case the agent is an abstract entity. A corporation is such a group of people. But so is a nation state. So why is corporate ownership compatible with free market, but government ownership supposedly its antithesis (socialism)? Or, a company may distribute its money among its assets, perhaps a "bail-out" to one division of the company in order to save it, all in order to serve the greater good of the company as a whole. But when the nation state does the same thing, it's socialism.

"There is no problem being exposed of the free market because the market was never free in the first place."

We haven't had a free market in decades, over one of the greatest periods of growth in world history, and yet it's "dangerous" to acknowledge a need for regulation of derivatives markets?

This is free market fundamentalism, in its purest form. "It will also shake out eventually" needs to be balanced with "in the long term we'll all be dead." When people gladly embrace a long, painful recession during which deprivation and suffering all increase on a massive scale, all so that the market can remain pure, unsullied by dreaded government intervention, then we know we want people working for the sake of an economic system rather than the other way around.

"All the bankers who should be losing everything are instead being bailed out, which is precisely what they expected when they took such fantastic risks in the first place. Thanks, Government intervention!"

There is a problem of moral hazard. If people think they are getting bailed out, then they'll engage in riskier behavior. But it seems you've been sucked in by a label--"bailout". Huge banks have failed, and others have lost half or more of their stock market value; thousands of bankers and traders are unemployed, and tens of thousands more will be unemployed. I can't feel that sorry for them, but I doubt bankers are saying, "I made a lot of crazy bets on credit default swaps, and when the bubble burst, the only hit I took was that my 401K lost a third of its value, I lost my job, and my company was taken over by the Feds! Let's roll the dice again!"

"In a free market, the financial institutions who made bad decisions would be left to fall, and those who did not would prosper in thier wake, and Main Street would never have been touched."

That's a really nice story, but it doesn't bear any resemblance to economic history. Financial markets are not ping-pong tournaments that rich people play in New York, they're the lifeblood of the economic and main vehicle of capital accumulation. Vacancy rates in homes are at all time (recorded) highs; short term credit markets had all but frozen before the "bailout"; the TED spread was off the charts. Smaller, local banks had plenty of time to step in and supply the near-complete lack of credit, and they weren't doing it.

Countries that have undergone financial crises like the one we're going through have experienced long, painful recessions that were worse in cases where government remedies were slow or non-existent. Ben Bernanke is not some left-wing nut who thinks nationalization is the answer on some dogmatic ideological grounds. He knows his economic history.

The real danger is the fact that we think the free market is some kind of magic power we just have to believe in absolutely, in a very simplistic way, and without question for it to work. In the real world, economics is a complex subject with all kinds of difficult questions that don't come down to free market vs. anti-free market.

Well said.

I hope you realize that Keynesian economics has a nearly unblemished record of abject failure.

Free market solutions represent a "least bad" approach to a sustainable economy. If there is a free market solution to a problem, the probability of it being superior to the heavy hand of government regulation is quite high. That's the way of things. Belief in free market solutions isn't some religion. You don't have to be a genius to realize that solving the problems of inflation and debt with inflation and debt and praying that will make things better, which is exactly what the Federal Reserve is doing, is merely throwing gas on the fire.

If anything "froze" the market, it was the promise of a bailout itself. The promise of making everything all better. So all the banks, instead of cleaning up the mess, having been essentially holding thier breath and holding out their begging bowls.

What can anyone point to that the government has done in the past year that has had any positive impact on the economic situation, whatsoever?

I hope you realize that Keynesian economics has a nearly unblemished record of abject failure. Free market solutions represent a "least bad" approach to a sustainable economy.

Your first statement lets me know how myopic your worldview is. You are calling any social democracy in the world an abject failure. If you can't see the foolishness in this statment, There's no point in arguing it with you.

I can point to "free market" countries like Columbia under Pinochet, or any of the southern Cone during the 70's, and call free markets a failure of human rights. But i have a feeling you'll call these "not real free market".

If they weren't free market, what is, as applied in the real world not some theoretical perfect world.

The long painful recession is a direct consequence of desperate, short sighted Keynesians trying to make it dissapear by waving a dead chicken around and hoping confidence can be bought

Keynesians don't want the gov. to purchase bad credit made by unregulated banks. Keynesians don't ask to give $700 bn to the top banks to "help them". I don't know what you think Keynesian policy is.

My main question is, how is a bank packaging up bad loans supposed to be caught by the "free market"? If a bank lies about it's mortgages it's selling, and it's not "against the law" (regulated) how does the free market handle that?

Welcome back calligraph.

We haven't had a free market in decades, over one of the greatest periods of growth in world history, and yet it's "dangerous" to acknowledge a need for regulation of derivatives markets?

As I said. The market itself is not a "free one". Growth in and of itself is nothing special or even particularly desirable. With fiat currency, its actually mandatory just so money can exist at all. The derivatives market itself would not exist were it not for the fiat currency system imposed by the government. So if the problem in this particular instance is government... the solution is, more government?

This is free market fundamentalism, in its purest form. "It will also shake out eventually" needs to be balanced with "in the long term we'll all be dead." When people gladly embrace a long, painful recession during which deprivation and suffering all increase on a massive scale, all so that the market can remain pure, unsullied by dreaded government intervention, then we know we want people working for the sake of an economic system rather than the other way around.

No one is gladly embracing a long painful recession to keep a market pure. The long painful recession is a direct consequence of desperate, short sighted Keynesians trying to make it dissapear by waving a dead chicken around and hoping confidence can be bought with the resultant never-ending stream of Federal Reserve Notes hot off the printing press. Inflation is the heaviest tax in the land, and hits the poorest the hardest. You, being a Keynesian, are more responsible than anyone for the pain and suffering of the masses that results from extended economic recessions.

There is a problem of moral hazard. If people think they are getting bailed out, then they'll engage in riskier behavior. But it seems you've been sucked in by a label--"bailout". Huge banks have failed, and others have lost half or more of their stock market value; thousands of bankers and traders are unemployed, and tens of thousands more will be unemployed. I can't feel that sorry for them, but I doubt bankers are saying, "I made a lot of crazy bets on credit default swaps, and when the bubble burst, the only hit I took was that my 401K lost a third of its value, I lost my job, and my company was taken over by the Feds! Let's roll the dice again!"

Look at the employment history of the following individuals.

Henry Paulson, Mario Draghi, Neel Kashkari

Just try and tell me that the top executives of the corporations which will benefit at the expense of the taxpayer aren't being catered to.

That's a really nice story, but it doesn't bear any resemblance to economic history. Financial markets are not ping-pong tournaments that rich people play in New York, they're the lifeblood of the economic and main vehicle of capital accumulation. Vacancy rates in homes are at all time (recorded) highs; short term credit markets had all but frozen before the "bailout"; the TED spread was off the charts. Smaller, local banks had plenty of time to step in and supply the near-complete lack of credit, and they weren't doing it.

Home vacancy rates are a direct result of the "creative financing" (ARMs, NINJAs, and interest-only loans), praised primarily by Democrats initially, which all started coming to a head at the 2 year mark which is ussually when the payments change to become more than the borrower can afford. Home vacancies are primarily the fault of people who knowingly borrowed beyond thier means.

Regarding the "frozen" short term credit market. Can it. More outright lies from Paulson and Co. to convince people like yourself to give them all of your money (and your children's money, and your children's children's money). The market was never frozen.

http://www.independent.org/blog/?p=201

The real danger is the fact that we think the free market is some kind of magic power we just have to believe in absolutely, in a very simplistic way, and without question for it to work. In the real world, economics is a complex subject with all kinds of difficult questions that don't come down to free market vs. anti-free market.

I bring to the table the assertion that free market solutions to specific problems consistenly outperform state regulations with the same intentions. I support this with actual facts and examples (such as contrasting the 1921 crash to the 1929 crash). What do you bring to the table?

I bring to the table the assertion that free market solutions to specific problems consistenly outperform state regulations with the same intentions. I support this with actual facts and examples (such as contrasting the 1921 crash to the 1929 crash). What do you bring to the table?

Posted by: Dominic Saltarelli

Dominic, I can't imagine you making such a statement at a time in history with more immediate examples that prove you completely wrong.

Healthcare, Global warming and our energy crisis, trading mortgages as a commodity, The current food crisis, education...

All of these things have been handled well by government programs in other countries but American insistence on half-assing govt and trying free market "solutions" have lead to catastrophic failures in the US.

Just about everything about the “free market” (I love how people refer to this with almost religious deference) has to be controlled by government if we expect a good outcome. We just spent most of the last century imposing environmental, product safety, and worker regulations on industry that only a few of the most delusional and childish “free marketers” could oppose. In a totally free market we would expect industry to do all this on their own, right? Of course not. To come to anything approaching a decent and fair society, governments have had to apply all sorts of restrictions on finance and industry.

I hope you realize that Keynesian economics has a nearly unblemished record of abject failure.

That is debatable, to put it politely. I think what we are finally seeing as an abject failure is the Freidman/Chicago School model which has been busy dismantling (or at least attempting to dismantle) all of the safeguards implemented after the Great Depression, as well as the progressive income tax which has created the biggest disproportion of wealth in American history.

As far as positive government action in all of this mess, at least the dollar is strong again. Why they allowed it to slide so low is a mystery to me. I pretty much blame all of this on the wars we can't afford. We are bleeding from every pore.

11.

Sorry to butt in, a moist urgent urgency compels, I was once such an avid Ayn Rand reader, ironically around 1981, then I had no idea she had anything to do with Reaganism (she was co-author with Green Greenspan, who should have stuck with jazz clarinet (instead of economese obscuret), of at least a few booklets); I have long wondered if computerization would have made a difference with central planning, even Fascism. Our one dollar, one vote, everything for sale, including laws, regulations, mores, norms, fetishes, you name it.. It's simply panglossalalia to trumpet "free market" ideology. Free? Free to do what, by whom to whom? Under what constraints? Am I free to own slaves? To sale my children? To hire undocumented workers for an organ-harvesting business I want to start up (read Charles Bowden about Juarez Ciudad, Mexico)? We can all agree there must be limits.

?

We can NOT all agree that there must be [any particular] limits!

That's the crux. "Free" is, next to "God" the most ambiguous, polybiguous, multibiguous, which ever, word in any language. We assume, presume, exhume, but we can't agree tacitly. Wink wink mutates into Oink oink:

"(sometimes it isn't true incompetence - it's actually greed)"

I do think the internets, the google, the Napster, etc. make Socialism, the great Bete Noir of pro-America Americans, much more feasible than before. And in theory, the great melanothere can be domesticated, and we can all have our "free"dom too. But, as Buckminster Fuller might have said, Every Icarus needs his Daedalus.

Th financial daedalusus have lead us into a dead end. But just wait...

until the Eoclogy melts down, the economy collapsing is a mag 2 earthquake, the ecologic Malthusiana will be 11 on the Rich-ter gamut. Computerized eco-fascism is what I'm waiting for. Not as a pose, stance, etc. As a last hope to avoid extinction.

!!.

Dominic Saltarelli's saltarellos are moist impressive, convincing, like hearing Ron Paul, or Ayn Rand. But. I think that the story of Jack and the Beanstalk (which is native, American, that widespread) is much more profound and instructive, or Humpty Dumpty, Jack Horner. Nursury Rhymes are more apropos than fairy tales.

Damn, Phil... my favorite post from you yet! Nice work.

The problem with so many people is their continual misunderstanding of economics and what type of economic system works best.

There is no such thing as a "pure" system; all economies are a mixed affair, incorporating and synthesizing a vast array of economic models, ideas, strategies, and systems.

Free market capitalism, with its wild swings of boom and bust and great inequalities of wealth, is balanced well with the social stability of a social-democratic welfare system, proving time and again that these two competing economic systems do not need to exist exclusively of each other, but in fact work best together at achieving not only economic stability, but also social stability. Capitalism creates wealth, while socialism creates equilibrium and a fair and equitable distribution of that wealth.

The question is, in a modern state, how much of one or the other works best for all citizens?

To naively state that the pure application of one type of economic system works best over all others is insane and destructive.

So, please, spare me all this childish and Manichean idealism about the superiority of a pure free market system over all others. It is horseshit and goes against 300 years of history proving time and again that a single idea, ideology, or rational application of a single social, political, or economic system ever works best all by itself.

It's like we have to re-teach the simple tenats of the Enlightenment to each new generation by forcing oursleves to re-live the stupidity of the past instead of forging ahead.

This is 100% true. There has never been a system of commerce without government, nor a government without a system of government.

Every tariff, tax, law and subsidy is direct violation of an ideological "free market".

However, let us keep things in perspective. Compare the three following measures of regulation, in terms of overall effect on the economy.

  1. Autos must include seat belts

  2. Banks must not discriminate, and offer home loans to people who simply cannot afford to own a home

  3. In late September, the Fed released $400B USD into circulation, even before Congress approved an additional $840B bailout package

Bad analogy time: you're playing poker. You have a straight, you're opponent has a flush, and a brief argument breaks out over which hand trumps the other. Meanwhile, Ben Bernanke lays down 5 aces, and no one says a word as he takes the pot.

Forgive the typos- no edit feature, not enough coffee yet.

Norm- add an edit feature, and I'll buy a mug. Deal?

Obviously, no debate on the free market is complete until we Paulians get involved. :)

I'll be brief:

  1. The Federal Reserve, of which Greenspan is a former chair, is a de-facto regulatory agency

  2. Our economy has a central bank, is centrally planned

  3. The policies of Greenspan under Clinton, and continued by Bernanke under Bush, were the prime cause of the dot-com bubble, the 2001 recession, the 2003 housing boom, the 2006 housing crash, and the 2008 bailout.

Each and every one of you demanding new regulation must first pause, and ask yourselves the following:

  1. Is Zaphod right? Is the Fed a regulatory agency?

  2. Has the Fed helped the situation, or hurt it?

The GOP talking point du jour is that the Government caused this mess by forcing the poor banks to loan people money for homes they couldn't afford. Although a contributory factor, it is myopic to blame this and this alone.

The progressive community talking point du jour is that regulation is essential, and that proper regulation would have prevented this mess. This statement is completely oblivious to the actions of the Federal Reserve.

It is my understanding that most of you opposing the "free market" do so from a Nader perspective of wanting more consumer rights and protections, or from an opposition to the massive inequality of wealth made possible by the current system. I am sympathetic to both concerns.

However, when we talk about the "free market" as a whole, the issue is macroeconomics. And, on the macro scale, no regulation has had more effect on our present situation than the Fed.

For both sides to so blatantly ignore the Fed's role in this, even as Greenspan himself renounces his Rand-ian origin, is completely asinine.

Herein lies the fallacy: those of you demanding more government regulations must first acknowledge those who are already doing the regulating, and what the effects of those policies have been. Those of you opposing government interference in the market must first acknowledge that our central bank comes directly from the pages of the Communist manifesto.

Unless you are willing to rise beyond the partisanship, the crisis will remain a mystery to you, and monetary reform will remain the domain of fringe parties and fringe candidates.

While what you say seems, to an economics layman like myself, to have many merits on points, I think you paint a picture that doesn't take context properly into account. Yours may be a perfectly principled stance, but to my understanding, it doesn't appear to be very practical in terms of breaking a deadlock between the dominant political factions currently manipulating the levers of power.

Specifically, the non-Paulian (to give you the benefit of the doubt) free-Marketeers appear hell-bent on enacting policy (and regulations!) that would allow resources to be pooled at the top more readily than they currently are or were since the 20s, increasing economic inequality be damned. The "liberal regulators" appear to favor policies that would at the very least, preserve the illusion that the economic system that everyone must participate in isn't so subject to manipulation that repeatably and inevitably results in such unequal pooling. Due to my ignorance, I'm not sure if their proposals will actually reduce inequality, but they certainly pitch it that way.

It seems clear to me, that many of the skirmishes conducted between these two camps are short-term solutions in a trench warfare, and the free-Marketeers are currently winning, though their momentum may slow this year. (Many of the free-Marketeers are Dems as well, so this isn't guaranteed even in a wave election.)

Your suggestion appears to call for some large-scale redefinition of how business is done in our society. Moreover, it is a very long-term proposal (and one that is a bit short of specifics for me, but I'm a layman, so I could be missing obvious things).

What strikes me is (assuming for the moment that your ideas are in fact the best solutions) is how you get from where we stand right now to a point where your proposals aren't in fact considered fringe. Currently, the political will appears absent to enact what you want. How do you get from A-to-B without abandoning those who would suffer if the non-Paulian free-Marketeers were to get their way and promote regulation that lines the pockets of the rich and oppose regulation that protects the poor?

The problems in our economy are two fold.

  1. Greedy Money types are trading anything they can get their hands on as a commodity. Turns out, homes in the ghetto are not something to be trading futures on. Regulations need to put an end to this nonsense and keep a close eye on the crooks.

  2. The much much larger problem is the ticking time bomb of a carbon based society. One of three things will occur in the next 20 years, peak oil, third world consumption increase, or climate change progressing to the point where carbon fuels need to be made illegal. Any one of those will cause an enormous energy cost spike that will make much of our capital worthless. Not just our cars, power plants, but also suburban homes, huge store chains with no local suppliers and enormous distribution networks. When all these things depreciate, there will be an enormous cost. Investors all want out before the bill comes due.

Solutions.

  1. regulations and some stimulus is just a short term bandaid. Undoing the damage of the last 30 years of trickle down economics will take some time, but without a healthy working class and a healthy middle class our economy will be inherently unstable.

  2. Slow change over time would be the best to address the second. Only problem is that heavy industry has stalled all attempts for slow change during the last 30 years. My suggestion would be the nationalization of oil and coal. Use the earnings to invest in new technologies for energy production. Also give tax cuts to the regular folks that will need new houses cars, mass transit, etc.

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