Disaster Capitalism: When Free Markets Go Wild!

No.: 
19

One does not have to agree with all or most of Paul Farrell’s fourteen points on disaster capitalism to appreciate the thesis: Our country has been hijacked by a network of elites and our American heritage is now hazarded. The “democratic capitalism” that we’re pushing worldwide is plutocratic democracy and exploitative of the masses. We’re ruled by celebrities as pawns and money moguls as monarchs. As we succumb to this hijacking we pull down the rest of the free world. A fight for Wall Street’s America is now an inadvertent defense of the beast in our land. When we bail out Wall Street we affirm beast’s capitalism, not the capitalism of our fathers.

Increasingly, Wall Street’s wealth is not found not in its gutted corporate balance sheets but in private accounts strategically hidden in offshore banking centers. Forget the Forbes 400. We need to identify the elites who plundered Wall Street’s unsustainable business model so that they could launch financial predations in secrecy and without taxation from international platforms. What is this anyway but a ripening of the “open society” where vast sums of money are moved electronically to capitalize upon any vulnerability in any country. It’s the work of neocon elites as helped by their uncomprehending foot soldiers.

We cannot fight this calamity unless we understand the nature of the confusion that causes many patriotic Americans to inadvertently support the very things that work against patriotic interests. Sure, the problems are complex and intertwined: they involve culture, religion, public education, entertainment, and more. But central to our problems is a failure to differentiate between efficient rules for markets and counterproductive regulations. Prudent rules in financial markets help prevent the unscrupulous from getting the upper hand.

Free market advocates insist that the apparent faults of free markets are not reflections of market failure but the result of government involvement. This idea may look good on the surface but it is implausible. Financial markets with national scope cannot exist in highly sophisticated environments without governmental rule making, superintendence, and regulation.

The core argument advanced by free market advocates is a classical sophism. It hypothesizes an unrealizable state, then claims that market dysfunctions are not the result of excess (the abuse of freedom) but failure to realize the hypothetical state. It is time to put this nonsense in the dustbin where it belongs.

All free markets have rules, whether implicit or explicit. The free market in capital assets in the U.S. during the 1985-2007 period was structured by hundreds of rules. While the laissez faire movement did produce sweeping deregulation in key aspects of banking and capital markets, nothing like a theoretical “free market” was reached in matters of regulatory procedure and process. Intensive legal guidance in procedural details was sustained even as superintendence over regulatory implementation and monitoring was rolled back.

Most importantly, the foundational rules governing leverage and the use of collateral for speculative purposes were allowed to slip into obsolescence as derivative products became more complex. Along with this failing, many rules bearing on financial excess were gutted, the wreckage hidden behind a veil of trivial regulations that produced a superficial appearance of supervision. This regulatory calamity turned capital markets into rodeos and opened economies to the ruination of leveraged speculation.

In an ideal world most attempts at governmentally instigated capital redistribution would be minimized, thus reducing the burden of unintended consequences that accompany intervention — especially intervention during times of crisis. If this is the world that free market capitalists pine for, they need to do their homework. Minimal capital redistribution is only possible in just societies when governments prudently structure the rules. Excellence in rule-making reduces regulatory overhead and conflicts of interest. Prudent rules uphold fairness, facilitate the common good, and provide a hospitable environment for sustainable progress.

Prudence was not the mantra of free markets during the 1987-2007 period — a period when markets grew GDP massively but only by leveraging the economy into a crisis condition. These markets facilitated plunder and pillage for financial elites. As a result, we now move toward over-regulation and the dubious expansion of governmentally chosen winners and losers. This unfortunate development reflects not only laissez faire excess but an underlying culture of greed. Who wants to be patriotic about excess!

Careful people are not calling for socialism or a regulatory state. The call is for appropriate rules to structure the environment of commerce so that markets can work efficiently and with good resistance to gaming, manipulation, corruption, and asymmetrical outcomes. It is past time for neo-cons and self-styled patriots to stop labeling public superintendence as “socialism.” The fact is that a lack of proper market regulation is now shoving us into the most unfortunate socialism of all — the socialization of moral hazard.

Knowing this, we ought to engage in creative discussions about prudent rules to govern finance capitalism. Granted, our experiences with the FED, the Securities and Exchange Commission, and the Commodity Futures Trading Commission serve as warnings that great hazards await when wolves are appointed as henhouse watchdogs. This is why it is essential that the financial industry be de-centralized away from New York City. The Manhattan Island culture is irremovably greedy. When people from that culture dominate both the financial institutions and the regulatory agencies, there is a marriage of self-serving interests. No regulatory reforms will work adequately until the cultural conflict of interest is ended. And no general recovery for America will occur until we rediscover the original ethos of our greatness.