Thoughts, essays, and writings on Liberty. Written by the heirs of Patrick Henry.

“The essential quality of a free economy is that it cannot be planned. It leaves the solution of problems to the inspiration of the individuals in the untrammeled population. When something approaching a free economy has existed, it has always worked better than the schemes of any planners.”     Thomas H. Barber

October 20, 2008

The Death Of Free-Market Capitalism Is Greatly Exaggerated

by Doug Mataconis

Some surprisingly cogent wisdom from the Editoral Page of The Washington Post:

IS THIS the end of American capitalism? As financial panic spread across the globe and governments scrambled to contain the damage, reality seemed to announce the doom of U.S.-style free markets and President Bush’s ideology. But this is wrong in two ways. The deregulation of U.S. financial markets did not reflect only the narrow ideology of a particular party or administration. And the problem with the U.S. economy, more than lack of regulation, has been government’s failure to control systemic risks that government itself helped to create. We are not witnessing a crisis of the free market but a crisis of distorted markets.

(…)

We’ll never know how this newly liberated financial sector might have performed on a playing field designed by Adam Smith. That’s because government interventions of all kinds, from the defense budget to farm supports, shaped the business environment. No subsidy would prove more fateful than the massive federal commitment to residential real estate — from the mortgage interest tax deduction to Fannie Mae and Freddie Mac to the Federal Reserve’s low interest rates under Mr. Greenspan. Unregulated derivatives known as credit-default swaps did accentuate the boom in mortgage-based investments, by allowing investors to transfer risk rather than setting aside cash reserves. But government helped make mortgages a purportedly sure thing in the first place. Home prices seemed to stand on a solid floor built by Washington.

And, much like the great Tulip Bubble that once gripped Amsterdam, the price of houses rose and rose, and the popular culture started to emulate the absurd idea that what goes up, must continue to go up. Sit back some time and watch a pre-2008 episode of HGTV’s My House Is Worth What ? or House Hunters and you’ll see what I mean. It was a market bubble just like any other we’ve seen in the past, and just like every other market bubble, it was created largely thanks to the benevolent intentions of government.

But, of course, this is the Washington Post, and while they correctly point out the fact that it was government intervention that created the distorted market that led to the problems we face today, the solution they suggest is more government intervention:

The new capitalist model that emerges from this crisis must operate according to more consistent principles. The Fed should set interest rates with the long-run value of the dollar in mind. Government must be more selective about manipulating markets; over the long term, business works best when it is subject to market discipline alone. In those cases — and there will and should be some — in which government intervenes on behalf of social goals, its support must be counterbalanced with taxpayer protections and regulation. Government-sponsored, upside-only capitalism is the kind that’s in crisis today, and we say: Good riddance.

That last sentence is absolutely correct, what’s mind-boggling is that the entire paragraph that precedes it contradicts the conclusion.

The Post is right that it was government interventions in the mortgage and housing market that created distortions and an artificial bubble that was destined to pop, but the Editors ruin that otherwise excellent point when they insist that the solution to distortion-creating government intervention is………more government intervention.

Wouldn’t that just create yet more distortions guys ?

I don’t expect an answer, but I do expect an apology from everyone who has blamed this crisis on free-market capitalism.

Cross-posted at Below The Beltway

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2 Comments

  1. Doug,

    I read that paragraph differently than you do… I read it more as the below:

    “Government overreaches of regulation in some areas and lax behavior in others, coupled with letting social goals drive policy instead of economic stability, have caused innumerable problems over the last decade. In order to fix the problem, the government should commit itself to a stable dollar, minimal and predictable regulation, and embarking on social projects only when the costs and benefits are justified. This “chicken in every McMansion’s kitchen” type of privatized profit and socialized losses capitalism is dead, and we say Good Riddance.”

    I don’t see a call for huge new government meddling in their paragraph. I see it as the typical response of a limited-government entity. Have just enough regulation to keep markets free and fair, and just enough of a safety net to keep people from starving in the streets. Let the market work out the rest.

    I’m not sure how the author intended the paragraph, but that’s the reading I have– particularly after the two preceding quoted paragraphs.

    Comment by Brad Warbiany — October 20, 2008 @ 4:10 pm
  2. I was going to write a more detailed comment, but then I saw that Brad wrote most of what I would have written. The sense I get from the paragraph is essentially “government regulation exists and is unavoidable; but to the extent that it is unavoidable, intervention should be done rarely and with a goal of maintaining a stable currency taking precedence over short-term “stimulus.” When government does intervene to prop up businesses (which should be done rarely, if ever), that intervention should come with strings attached to protect the taxpayer to the fullest extent possible.”

    Comment by Mark — October 21, 2008 @ 6:45 am

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