Winthrop Quigley of the Albuquerque Journal claims to be a “free market fan” in his column in today’s paper. He then spends 800 words defending the various bailouts passed under both President Obama and Bush. Worse, Quigley makes no serious arguments in defense of massive government intervention. The best he can come up with is the fact that the recession supposedly ended in the middle of 2009.
To say the least, I find his arguments dubious. Kind of akin to the Aztecs sacrificing a virgin to the gods for a good harvest and believing that sacrifice to be effective when the harvest turns out well. Quigley essentially admits this at the end of his piece.
I believe that government policies have actually exacerbated the current crisis and sown the seeds for an even greater future crisis. This has been the case historically as the “too big to fail” Long Term Capital Management and the pumping up of the housing market through Fannie and Freddie are two major policies that sowed the seeds for the current crisis.
The market –even a heavily-regulated one like we have now — is more resilient than Quigley seems to believe. If the big banks, AIG, and even the automakers had failed with no bailouts, the US economy would emerge from this crisis in much better shape than before with more responsible, less corrupt companies coming in to replace those that failed. Better still, the federal government would not be burdened with trillions of dollars in debt that Bush and Obama gave us. As this article from Reason Magazine argues, the economy is getting worse, not better thanks to these federal policies. Only time will tell, but I find Quigley’s arguments unconvincing.
I too read Quigley’s article. While it is true the bailouts did work I agree with you it was the wrong thing to do. While many do point to the CRA and the GSE’ s (Freddie and Fannie) as having sown the seeds for the meltdown I think it’s important to remind readers of other key elements. I’m talking about the decision to remove Glass-Steagal thereby allowing the “safe” banking sector to merge with the “risky” investment market sector. I’m talking about the opaque credit default swap (CDS)market. A CDS is really an insurance product yet it is not treated as such thus since no capital reserves are required to be kept on hand as is the case with insurance. I’m talking about accounting regulations that permit hidden assets and allow dubious valuations. I’m talking about a culture on Wall Street where intense lobbying efforts have worked to the “Street’s” advantage thereby allowing it all the rope it needed to hang itself yet having a fail safe switch to stop the drop, at a cost to taxpayers. All the elements I mentioned were rules investment houses wanted and got. In other words, they have a “free” market with little government interference. For “free” markets to work there have to be some rules otherwise everyone loses.
Exactly, Mark. Deregulation strips things that protect companies from themselves. And therefore protects us.
Regulation is necessary, and stripping that regulation hurts America.
But, who regulates the regulators Mark and Richard?
It is precisely because of regulations and government policies, which create perverse incentives by interfering with the natural discipline otherwise afforded by a truly free market, that big banks and insurance companies have been able to engage in such unseemly behavior.
An authentically free market in the financial sector would operate to minimize (not eliminate completely), through competition and sunshine, the opportunity for fraud. Just ask your average small business owner, perhaps the least regulated example available, about the discipline of the market.