How Is The "Free" Market Working For You?

What is a “free market,” and does its nature matter? It matters all the more now that Morgan Stanley’s CEO John Mack is calling for the oversight of the financial services industry by a global authority. A laissez faire approach to rule-making produced the environment where Morgan Stanley leveraged itself more than 30 to 1, with some hedge funds that it services going higher. What is this phenomenon if not ‘greed gone wild’? Still, free market apologists blithely declare that markets provide their own remedies and correctives if given space and time.

Well, this is the space and now is the time! How does the “start” of major market correction feel as global stability comes unhinged and everything is put at risk? Should government stand by helplessly and let a Great Global Depression sweep the world? Maybe that would clean up some failings, but it is not politically feasible. After all, this is a representative democracy and honest people don’t want to be put on the street to pay for the sins of executive speculators. It is burden enough to have one’s standard of living taxed away by inflation to pay for the bailout of thieves. FED chairman, Bernanke, admitted as much yesterday when he told the Economic Club of New York that the nation was grappling with a “very serious, too-big-to-fail problem.” (See “Bernanke sees long slowdown....” 10-16-08, at MarketWatch.com) That’s what rule-free markets did to us: They allowed leverage, liabilities, and institutional madness to grow to a size where we could no longer afford the luxury of letting the market trim them back.

Since the nation cannot stomach the market’s unbuffered medicine, moral hazard is elevated as a public virtue if it saves the economy. This turns propriety on its head and makes the nation’s leadership look like town fools. But what is the alternative when financial markets correct the extremes of exuberance with extreme forms of societal catastrophe! This is the way markets work, and this is why free markets need to be guided by moral, prudent and efficient rules. Proper rules don’t require heavy regulation. Happily, they keep the playing field fair and the prevent the development of dangerous extremes. When problems do develop in context of proper rules, the remedies are affordable to society. Indeed, the remedies are generally within reach of market based correction. This is not MIT rocket science. It is, however, illustrative of how severely our Ivy League business schools have failed the national interest with their near-garbage economic theories.

The world has never seen extremes like the ‘free market’ has produced in the last ten years: Trillions of dollars of credit swaps now swamp us as the underlying economy heads into a global slowdown. The financial underwriting for most of these swaps is indefensible, the guarantees themselves being leveraged by other impossible to fulfill insurance policies. Thus, there exists a mountain of derivatives that are little more than lies without substance — until the government intervenes with taxpayer dollars. These lies promised the highest rewards in market history — outsized rewards for morally bankrupt or at least hopelessly naive executives who failed their fiduciary trust. Yet, neo-con free market advocates urged until recently that these people be rewarded at whatever rates the (corrupted) market would bear. Incredible. The depths of these moral failings are so great as to require national repentance and a new social ethos. This does not happen by piling on more debt to revive growth, as both main parties urge.