Thursday, October 30, 2008

On Daming "Free" Markets!

Currently, there is a rush to jump on the bandwagon to damn the concept of free markets…or, at least “freer” markets. I say “freer” markets because the American economy has never had totally “free” markets. But, the current meltdown has coincided with the claim that “freer” markets don’t work!

We even see the sorry spectacle of Alan Greenspan appearing before Congress and admitting that he was “shocked” that the system didn’t work as he had imagined it would. The problem with this, in my mind, is that Alan Greenspan, in his responses, had to take one of two positions. The first one was to admit that his conceptual thinking about how financial markets and the economy worked was wrong. The second one was that he…and the Fed…and the Bush administration…screwed up royally.

Perhaps there was really only one response that Greenspan considered.

It is important to consider the second possible response, however, because it is important for our consideration of how we interpret the financial meltdown and the causes of this meltdown. How we interpret these events will influence our efforts to regulate or re-regulate the financial system.

Returning to the concept of “freer” markets one must argue that we can never achieve completely free markets, that there will always be laws, regulations, and regulators that impact financial and economic markets. The issue is where the balance is struck between more oversight and control and less oversight and control.

The danger is that if we totally focus on the idea that markets don’t work very well without a lot of regulation and oversight we will set the balance further to the side of constraining and controlling the economic and financial system. In my opinion, this would not be helpful, in the longer run, to the financial system and the health of the economy and economic growth.

Certainly, industry leaders cannot be absolved of all responsibility. It can be strongly argued that the past eight years or so did not produce a stellar performance by the leaders of finance and commerce in the United States. Risk management and executive oversight fell fall short of what should have been desired. But, this is not the entire story.

For economic and financial markets to function in an effective way they must be associated with “appropriate” monetary and fiscal policies. I have argued for a long time that the monetary and fiscal policies of the Bush administration have been abysmal and these policies created an environment that encouraged the behavior that was exhibited by our leaders of finance and commerce. (See my post of October 28, 2008, “The Threat of Too Much Regulation,”

My big fear is that, in a rush to judgment, all the blame will be placed upon the greed of the bankers and the fact that financial markets don’t work well if they don’t have a lot of regulation. If we re-regulate American finance and industry assuming this to be the only story, I fear that we will only be dampening our future and our children’s future.

Also, if we make this assumption about our bankers and the financial markets we will let Mr. Bush and Mr. Greenspan “off the hook”. Our governmental leaders are at least as guilty of the current financial morass as are our industry leaders…IF NOT MORE! If we are to re-regulate financial institutions and financial markets in a sensible and realistic way we cannot ignore the role that our government leaders played in the current crisis. WE MUST BE VERY CAREFUL NOT TO OVER-REGULATE!

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