My confidence in the free market is shaken

I’ve always been a fiscal conservative. I mean I understood that the Trusts and Monopolies of the 19th c. were bad and intervention was necessary at that point. But I always thought it was no longer needed, beyond those minimum concerns. I assumed that companies would look after their own interests. Clearly that is not the case. They try to grab every short term gain they can without any thought to the future. This makes sense when you remember that companies are just people, and people want stuff now, especially in a culture of materialism that capitalism seems to imply or support.

Put simply, the stupidity of these banks surprised me.

I still don’t want a socialized state or publically run banking system, but damn. I’m not sure I’ll ever be able to trust the free market again. Go ahead and pile on me for being naive this whole time or whatever. I don’t mind. I really believed that we had to minimize regulation (stopping monopolies and price gouging, basically). Now I have no idea where to draw the line.

If the markets are honest, you can keep a free market. Nothing works if it’s fraudulent. In my opinion, one of the roles of government in the economy is to keep the markets free of fraud so that we can in fact have a free market that works for everyone. Another role of government is to foster competition and information in markets so that those participating can actually know what they are getting and receive information/services/goods that work. Neither of these activities stops a ‘free market’.

Yes yes yes yes! The best thing that could come out of this mess would be greater transparency and availability of information.

or the feeling that when you really fuck up big time, you lose your job without being given a golden parachute or handshake.
I’d really like to see that happen.

Couldn’t agree more. Before we write off free markets, we might want to actually give them a try.

Would transparency really have stopped this? I’m not so sure, actually. Certainly, it might have stopped the golden parachutes and such, but would it really have helped to avoid the crisis itself? We all knew the subprimes were out there and what was happening with them. Yes, fudging the numbers would have been harder, I guess, but the loans still would have been made because they rested on the premise that real estate always goes up. Transparency would not have changed that belief.

You forgot the second premise: the markets are never 100% honest. Seriously, give me a call when you find a financial industry where not a single one of the people in it is interested in finding the biggest, easiest money. They do not care about long-term effects, they care about what they can get when they cash out.

The crisis is so much more than the subprime loans. (Has there ever been a shiftier euphemism than “subprime”?) Making subprime loans is not a problem. It can even be a good thing if it’s done right. But securitizing those loans, selling and insuring and rating those securities on a shadow market and no one (even right now!) knows how big that shadow market is. This is at the root of the crisis and greater transparency into those financial transactions would go a long way to making things better.

It’s probably not the only thing that would help. But as far as oversight goes, it’d be a great first step.

Yeah, I’m a classic liberal, small government guy in general, but I think that government regulation is to the free market what police are to a free society: a necessary and practical limitation that keeps a fundamentally good idea from being sabotaged by ideologically inflexibility. Would we have greater freedom if we got rid of the police? Sure, but I think few people would want to live in the Mad Maxian society that would inevitably develop. I think it’s not so different for the economy. Invisible hand laissez-faireists tend to conveniently forget that even Adam Smith thought that government regulation of the market was not only a good idea, but an essential one.

Yeah, I have to agree here. Increased transparency is a good thing, and it probably would have prevented some of the most amazing excesses of greed, but it wouldn’t have corrected the basic flaw in free market ideology: the assumption that what’s best for companies is what’s best for society as a whole.

If you have a free market without regulation it is 100% guaranteed to crash after a while because:
A) Some people and by extension companies, are greedy and stupid (money now is better then money later) which leads to
B) smarter greedy people see others making lots of money with this, so they get in on it as well eventually which leads to
C) smarter non greedy people might see problems but hey, everyone is doing it and if everyone is doing it it can’t be wrong. => Bubble

In a society where being rich is seen as the ultimate form of “being the top” a free market can never function without having a regular crash cycle equal to the time it takes for the collective memory to fade.

Free market theory is flawed but it does work. It’s the morons advocating the no drawback, infinite growth version of it that keep causing these bad things to happen. A society that would take steps to decouple all basic life needs from the market rather then trying to steer it would be much better off because all the stupid short term kleptocrats will be burned over and over again. Whereas in the current system they really didn’t learn anything because the taxpayer ends up paying for the bulk of it.

I’ll take the free market, where a bust still leaves me living basically the same but paying higher prices, to communism, where a bust leaves me starving, or socialism, where I’d be paying silly high taxes and still having to live through the boom bust cycle.

Better, more, and more frequent data on the economy would be great. Which is why the attack on mark to market accounting is so terrifying. What will the numbers be based on if the SEC decides to suspend it? Voodoo.

Is anyone (well, anyone that matters) seriously advocating an elimination of mark-to-market as an ongoing policy, though? My understanding is that it’s a temporary measure intended to prevent firms from being forced into bankruptcy in the current crisis, and not a policy recommendation.

How nice for you that you can afford to think this way.

The free market isn’t so much of a problem as long as government does its job of protecting people from what Jerry Springer calls “the violence of a pink slip on a Friday afternoon” with a strong social safety net.

I would like to subscribe to your newsletter, sir.

It makes me so sad that such an eloquent and insightful turn of phrase as that one is going to be met mainly with befuddlement because of who said it.

That would be a pity. He’s an extremely eloquent guy.

coughstrawman argumentcough

You do have a point though: The cycle will go up or down no matter what. All (sensible) regulation does is affect how steep the curve goes up or down, not really if it goes up or down in the first place.

Also, “living the same” is seriously underestimating how bad things can get*

Respectfully

krise madsen

*) Not-so-worst-case scenario: Rampant crime. Worst-case-scenario: Lots of people in brown shirts and swastika armbands “explaining” how the Jews are really to blame.

Technically, I’d call it a false dilemma. ;)

The idea that the only available choices are absolute laissez-faireism or absolute socialism is simplistic and, more importantly, incorrect.