Our Trillion Dollar “Free Market” Surprise

By Justin Gardner | Related entries in Economy, Money

The news today is amazing, and just goes to show you that when the government wants to do something drastic, they can do it no problem. So don’t tell me we can’t provide healthcare for all or pay our teachers more or fix our infrastructure. Because if we have this much financial leverage to find this much capital to save our banks, we can do the same to help our citizens.

In any event, I’m with John Cole…

I do not ever want to hear another damned word about the free market. I don’t want to hear another thing about letting the market regulate itself. I don’t want to hear about the free flow of capital. I don’t want to hear about government getting out of our lives.

None of it. From superfunds to super-bailouts, I am tired of other people getting rich being irresponsible and then being told I have to pay to clean it up. I didn’t read one punitive aspect of this new plan. Not one punishment for the people who did this.

But please, feel free to explain to me how free market economics could have prevented this and it’s really all the Democrats fault. Because that’s what McCain is essentially saying.

More on the bailout plan here.


This entry was posted on Friday, September 19th, 2008 and is filed under Economy, Money. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

18 Responses to “Our Trillion Dollar “Free Market” Surprise”

  1. BenG Says:

    Justin,

    From the same post you quoted, John Cole also said: “… folks spent years making billions upon billions of dollars on risky transactions, more money on the stock of companies that was artificially high based on those transactions, more money bundling all those transactions into more transactions, and made a killing, and when it turns out the whole thing is a big pile of shit, you and I get the god damned bill.” Which I think is a beautiful summing up of the situation.

    The problem is, they HAD TO DO IT. The beauty is, that it happened during a Republican Administration and is now so disapproved by the Republicans in Congress. And that is why it helps the Dems in the upcoming election. No matter how you argue that these problems were started long before Bush, this development EXPLODES the Republicans current “free market” capitolism theory of economics into obliteration. And Bush’s actions, or gross lack of, shows a level of incompetence never before seen from a President, and it’s his own party that is complaining the most – all except John McCain!!!

    To answer your question, free market capitolism couldn’t have prevented this catastrophe b/c it’s the blind, unregulated excesses that CAUSED IT.
    Do I sound like a Liberal, Socialists Democrat when I say that? Really? Cause that’s what your President said just a little while ago – and that’s what spending 800 Billion tax payer dollars is about to try and fix!!

  2. Rich Horton Says:

    Well, John Cole would have to be an idiot of major proportions if he believed that we operated under anything even approximating a “free market.” We haven’t for well nigh of 130 years. That this comes as a surprise to him just proves how stupid he is.

    Christ, has he never read a word of economic history?

    This would be like someone complaining, when the next scandal hits a Senate member, “I don’t want to hear another damn word about the indirect election of Senators!” …and being dumb enough to mean it.

  3. Doug Mataconis Says:

    Justin,

    I’ve got to disagree.

    To say that what McCain is proposing — which essentially boils down to more regulation and more intervention — or what the Bush Administration has done over the past week is anything approaching a “free market” is quite honestly nonsense.

    McCain and others are trying to blame the Democrats for this, but they don’t believe in the market any more than their opponent on the other side do.

  4. mw Says:

    “But please, feel free to explain to me how free market economics could have prevented this…” – JG

    First, please feel free to explain to me how Fannie Mae and Freddy Mac have anything to do with free market economics?

  5. ExiledIndependent Says:

    Government and finances have been intertwined for decades, so a true “free market” is a myth. It’s like saying “true democracy.” We don’t have that either. So it is amazingly disingenuous to suggest that “free market” policies got us here. Selective tampering with the economy is what got us here, by people who aren’t responsible to the public and have no greater goal than to line their own pockets. This sweeping decision should simply remind us that we live–more and more every day–in a semi-benevolent oligarchy.

  6. Jon Dale Says:

    two words that anyone who wants to see Obama as our next president needs to repeat. crony capitalism. If he can just stop that he deserves two terms. Say it. crony capitalism. crony capitalism.

  7. John Says:

    Yes, well, clearly it is the greedy, bad guys down on Wall Street that caused this problem. Unfortunately it was deregulation (of which McCain trumpeted) that let them get us in this situation. So then, what are we going to do to those greedy corporate fat cats that McCain keeps talking about. Nothing, well… besides bail them out. There won’t be a single prosecution, some jobs will be lost, but they shift over to the next institution.

    Obama’s solution. but up the regulations needed, because these people can’t be trusted not to get greedy.

  8. Gaucho Politico Says:

    why should we punish the greedy people? there goal is to make money. History tells us they will always do this in any way they can. When we do not regulate and give them no rules or boundaries then they will do anything that seems to make money. Really expecting them to regulate themselves has never worked, ever, in anything.

  9. Surabaya Stew Says:

    Hey Rich Horton, I really don’t think John Cole is an idiot. He is simply throwing back what Republicans and Conservatives have been parroting about for the past odd-dozen years or so. (Keep in mind that he used to be a wingnut until he saw the light of moderation around 3 years ago.) All the things he mentions have been talking points for the right up until last week. He’s just telling them to shut up and eat humble pie.

  10. Justin Gardner Says:

    I agree that a true and pure free market is a myth, but a true and pure free market could NEVER exist, so it’s disingenuous to suggest that you’re only in favor of something that’s completely unrealistic. This is what I’m talking about and this is the definition that’s been used for decades.

    And given that this term is widely regarded as being representative of an economic philosophy of less regulation and oversight, Republicans have claimed that it DOES exist and is what drives our economy. So if they claim to own its successes, then they also have to own the failures.

    Moreover, deregulation and less oversight have gotten us to where we are today because free market economics breaks when false information is introduced into the data flow. In other words, when companies lie to make profits, cracks start to form in the foundation and there’s nothing besides government intervention that can repair the damage. How many times do you all have to see it happen for you to accept the fact that it’s a fundamentally flawed system.

    Mw, this whole ordeal isn’t just about Freddie and Fannie. But it was less regulation and less oversight that landed us in the place we currently are across the board, from Bear Stearns to Lehman Brothers to AIG and on and on. Again, the last time I checked those ideals are at the very core of free market economics. But please feel free to correct me if I’m wrong.

  11. Mike Says:

    I’m still waiting for someone to explain to me (maybe I’m just slow, honestly) how free-market greed caused people to make decisions that made their companies tank. Isn’t greed supposed to motivate you to get more money, not less?

    Honestly, I’m not trying to be sarcastic here. But how did a whole industry commit financial suicide by making decisions supposedly motivated by greed?

    I’m guessing there’s a simple answer I’m just missing. But if not, then you can’t blame this on the free market, as free market forces would have inspired people to make financial decisions that cause them to make more money, not less.

    I understand many executives made off with a lot of money, but it seems to me they would have made off with even more if their companies were still successful. So I still don’t get it.

  12. Mike Says:

    Oh, and let’s be clear. The trillion dollars being talked about, as far as I understand, it not straight-up what the taxpayers are paying. It’s the total cost of the loans the government is now backing. It’s technically possible that all of those loans could default, meaning the taxpayers would be responsible for all of it. It’s also technically possible the taxpayers could make a profit on them (seems unlikely though, otherwise why would the banks be trying to get rid of them?).

    Anyway, that point I don’t think changes the discussion, but I thought it was important enough to clarify.

  13. Jim S Says:

    In a never ending search for higher profits and less risk new methods of packaging investments were created. They actually became so complex that no one had any idea what they were really getting but they were being told that it was not only a high rate of return but it was safe. Of course in the end when it became clear that nothing was really clear it fell apart because in financial markets nothing matters more than trust and there was no more trust in anything. That’s how greed made everything fall apart.

  14. Mike Says:

    Jim,

    Thanks for the attempt, but I must be dense because it still doesn’t make sense to me. You describe how people ended up making bad financial decisions because they didn’t understand the investments they were making. Why greed would motivate people to do that is still a mystery to me. Greedy people want more money, not less. I could see how over-optimism could cause someone to make such a decision, but that’s different than greed and has nothing to do with the free market. The incentive in the free market is to make informed decisions, since the individual is (theoretically) the one who reaps the rewards and takes n the risks. Unless of course they knew that the government would take on the risk (which it is, in fact, doing now) in which case there is an incentive to make risky decisions. But that is actually the antithesis of the free market. In that sense you could argue that it is not the free-market that is at fault, it is in government intrusion on the free market (specifically, the expectation of government bail-outs).

    Anyway, I’m probably just a stubborn free-marketer who’s brain might explode if I start thinking I might actually be wrong about the virtues of the free market.:) So feel free to ignore me.

  15. Justin Gardner Says:

    Mike,

    While it’s true that greedy people want more money, not less, it doesn’t always work out that way, agreed? Because ultimately, greed leads people down questionable paths in search of more and more money…and sometimes they end up with less.

    Also, I think you make the mistake of characterizing greed as if it were somehow a state of balance between risk and reward. It’s not. What you’re talking about is preservation, which greed fights against. Greed just wants to eat and eat and eat. And it’ll keep eating until something stops it.

    What’s more, when other people are cheating, greed is leading that charge. And that’s what happened here. People were gaming the system, everybody knew these loans were incredibly risky, but since everybody seemed to be making money off of them, greed kept pushing for all to join in the fun.

    Listen, I’m not condemning the entire idea of free market economics, but as the quest for profits puts more pressure on corporations to bend and stretch the truth, it seems more regulation and oversight is needed. That’ll help us avoid another situation like this and the S&L scandal that happened before it.

  16. Mike Says:

    Justin,

    Clearly, in a free market, players have a huge incentive to consider the risk of their decisions. If they didn’t in this case, that suggests that the banks are failing not because of the free market, but in spite of it. The free market should have inspired people to make good risk vs. reward decisions, which they clearly didn’t because of greed. The question I’m asking is why did people make decisions that seem at odds with what a true free market would have caused them to make? The easy answer is “greed”, but then my question is why, in this case, was the risk of their decisions not considered? This isn’t just one executive making bad decisions, it was an entire industry, which suggests that there was a systemic reason.

    I’m far from an expert and many of the complexities are over my head, but this is the only reasonable answer I’ve come up with, based on the opinions I’ve read:

    By backing loans, the government took on some of the risk for those loans. So when a financial institution is weighing the risk vs. reward of a particular loan, the risk is artificially low because the government takes some of it. Even if the loans weren’t directly backed (I don’t know the percentage of how many were guaranteed and how many weren’t), the idea that they were “too big to fail” means that they were effectively backed. This causes them to make more risky (ie. greedy) decisions. Someone said earlier that they made those decisions because “they were told” they were low risk. In fact they were low risk if the government was backing them. And when times turned bad, sure enough the government steps in to bail them out. Perhaps if the government did not back these loans, and the banks had to take on all of the risk themselves (like it would be in a true free market) then they would have been more careful about making sure the people they were lending to could pay them back.

    Like I said, I’m not an expert so go ahead and poke holes in my theory, but at this point that still the missing piece of the puzzle before I blame the free market for this.

    With that said, I’m actually in agreement that more regulation is needed, if taxpayers are going to be guaranteeing the loans. But, according to my theory, it’s not a failure of the free market that causes the need for more regulation. If the government is going to assume some of the risk for these loans, they have to regulate in order to make sure banks are not taking advantage of artificially low risk.

  17. Alan Stewart Carl Says:

    This crisis involved a lot of people making a lot of bad decisions. One of the driving forces was low interest rates, set by the Fed — hardly a “free market” body. Those low rates made various ARMs ridiculously low and allowed a bunch of people who had no business buying real estate, do so. Anyone who knew anything about investing was predicting that, once those ARMs started readjusting, there would be hell to pay. What too few of us knew was that those bad loans hed been cut up and repackaged and then metastasized throughout the financial industry. When the loans defaulted and real estate prices tanked, the banks ended up holding property whose value was less than the original loan — and EVERY bank had at least a piece of that mess.

    Was that the fault of the “free market” or the fault of the Fed or a little of both? I think it’s pretty disingenuous for people to crow that the free market failed when this is just as much a failure of government policy as anything else. Let’s not turn a complicated crisis into a chance to pound our chests and declare our ideolgy superior.

  18. Donklephant » Blog Archive » State Corporatism &#8800 Free Markets Says:

    [...] examples here, here, here and [...]

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