Why Am I Not Surprised?

The health insurance industry people have already begun their maneuvers to get around some of the restrictions placed on them by the new law.

http://www.reuters.com/article/idUSTRE63E4QQ20100415?feedType=RSS&feedName=healthNews&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+reuters%2FhealthNews+%28News+%2F+US+%2F+Health+News%29

Many will look at this and say: See you cannot leave them to the “free market”. They will never do the right thing.

In response to this complaint, one of the commentators on the article said what I would have said but much better than I could have said it:

And these are the “honest” corporations that Tea-Party-ers and Republicans want to be left to themselves in a “free-market”, because “unregulated” big business will “benefit” the American people.

Sure, it will (!).

A truly “free” market would have no constraints on medical services, medicines, or licensure.

As soon as a government places restrictions on obtaining medical services, that government has created a restricted market that can be monopolized and leveraged against those who need it. Limiting free access to medicines or procedures naturally turns them into products and excludes segments of the population that cannot afford those products.

It is a governmentally-derived limitation that creates such a market (one which is no longer “free”). Thus, it automatically becomes the obligation of that same government, which created a situation excluding part of its population from access to care, to put into place those mechanisms of regulation that will restore access to excluded populations.

In other words, the medical market ceased to be “free” as soon as care and medicine were regulated in any form. We cannot now pretend that leaving those companies and institutions which provide governmentally authorized medical care to themselves in any way constitutes “free-market” practice, since in reality it is government-enforced “closed market” monopoly commerce.

Presently, before any of this new bill goes into effect, the “free market” medical industry already has to spend upwards of 340 billion per year to comply with government regulations. It has not been a free market for decades. The problems that we now have in accessing cost effective medical care are directly a result of the government already having crippled the market with its restrictions, regulations and price controls.

Please we have got to learn what the free market is and what it is not.

In Response to Questions 1

My daughter-in-law raised some good questions in her comments to my post- Free Markets - Yes or No (Part 2). Another commentator also had questions regarding similar issues particularly regarding deregulation. It was necessary that I begin another post to try to respond to their questions because of the amount of information. I appreciate the dialogue very much. I think we really need to discuss these issues. They are vital to our future.

Kat said...

Hmmm... I'm going to go a little off topic here, but I hope that this will all tie together.

The rise of populist movements can be traced throughout history with the rise and fall of economies. Recessions always bring populist movements. This recession has been very interesting for me in that it has brought up a conservative populist movement when historically those movements have been to the left of center.

I find it intellectually fascinating how the "pendulum" has swung. During the Progressive Era, the populist movements of unions and other labor/political activists brought about some VERY needed changes in the free unfettered markets in this country. While I understand that some people think that unions have outlived their usefulness; at one time they were needed. 40 hour work weeks are a good thing. No child labor is a good thing. A living wage is a good thing. None of these things were even an option during the early years of Industrialism and before government regulation of the markets.

I would like to throw the idea out there that perhaps we are in the mess we are in because of the opening and deregulation of the markets. I don’t believe that the government should control the entire economy, but I do think that some regulation is necessary.

Denny said...

...wasn't there a fairly regular cycle of booms and busts prior to the great depression and the regulatory controls it inspired, followed by decades of relative stability until deregulation started chipping away in the 80's? would i be wrong to associate a cause and effect there? i appreciate youre creating this blog and enjoy reading youre thoughts and comments

To begin with Kat --I was raised in one of the “steel centers” of our country - the Chicago/Lake Michigan area. My dad took care of his family (that’s us) with his 30 plus years at Blaw-Nox Steel Company in East Chicago, Indiana. For us the collective bargaining of the steel unions was essential. This bargaining made what otherwise would have been an unacceptably dangerous job acceptable and profitable for my dad and for us with benefits we all needed. However the danger of unions is critical to understand. Production is a very important factor in the level of wages. If within an industry production is up because of substantial demand for the product, wages also need to rise. For the employers within that industry unless they raise wages they run risk of losing their workers to other employers who see that there is much profit to be made if they can increase their supply of the product. This whole scenario has a tendency to force wages up to market level. The problem comes when some employers find a way to keep their employees but without raising the wages. In such situations collective bargaining is very useful for putting pressure on stubborn employers.

However the danger comes when labor unions become politically powerful enough to force wages above market. This will cause unemployment and other detrimental consequences. Minimum wage laws also increase unemployment. The balancing of wages has to be tied to production and the wage earner’s part of the production. If laws force employers to have to pay more than market or to pay employees above their productivity, they will lay off employees. As I read economists (not government economists) I find that there are many factors contributing to our present situation of persistent unemployment. The factors include the minimum wage requirements. The finger also must point to monetary policy of our government/Fed Reserve. The devaluing of the dollar has contributed to the loss of production which also results in unemployment.

Deregulation is often viewed with suspicion. Like taking controls off of powerful and wealthy folks seems like a dangerous policy. However, removing regulations and restrictions from markets is essential. But it has to be done with a respect for how markets work and has to be done within a market where its functions have not already been disabled. One of the fundamental functions of the market is price control - either up or down. Most people have no idea how powerful those forces are. I know I did not either. These forces are tied firmly to an industry’s participant’s ability to attain and maintain profitability. It is like a balancing act. On one side is the opportunity for increasing revenues and charging what the market will bear. On the other side are the risks. Risks of misunderstanding the market demand and being beaten out by competition. Sears for many years was the king of department stores. However, the company lingered in upgrading its business model. Lo and behold Sears found itself far down the ladder beneath companies like Best Buy, Home Depot and a host of others. Now Sears is having to hustle - innovate- improve service - to try to regain the lost market share. We (the consumers) are the beneficiaries of this situation that produces better products at lower prices.

So what about the financial markets and the deregulation that Greenspan allowed which resulted in the crisis we now find ours in? NPR covered extensively the recent Senate review/investigation of the financial meltdown we’ve just experienced. They brought in Alan Greenspan to answer some questions. He denied over again that the Fed was any cause of the present situation. He blamed Congress for encouraging Fannie Mae and Freddie Mac to purchase more bundled mortgage securities. They purchased 40% motivating mortgage companies to scramble to find more mortgages to bundle and sell earning significant commissions. In addition Greenspan maintained that the Fed had done everything that experts are suggesting that they should have done. And that because of what they had done, things did not turn out as badly as they could have.

There were comments that Greenspan was warned enough but ignored warnings. Greenspan maintains that the Fed policy of keeping the interests rates low did not encourage risky lending. Others say that this policy was indeed a contributing factor. There are many theories floated as to how this fiasco could have happened and under who’s watch did it occur.

AIG bailed out Goldman Sacks with bailout money orchestrated by the Fed. Goldman Sacks when accused of having a special privileged relationship with AIG enabling them to receive those funds replied that they did not have any such relationship. That their contractual agreement would have resulted in them receiving the funds in any case. Goldman Sacks stated that we should be willing to accept volatility from time to time considering what a valuable service they perform for the country.

All of this discussion, conflict and contradicting opinions among experts in the political and economic fields underscores an aspect of all of this that seems to be constantly overlooked. That is the conflict of interest inherent in the function and mission of the Federal Reserve System. The Fed is chartered as the lender of last resort. That has come to mean that the banking system will always have a way out regardless of any risky activity that backfires. The Fed promotes and supports fractional reserve banking, an age old practice which does not require that adequate reserves be held by any banking institution. When reserves are needed, the banks simply access their line of credit with the Fed.

All of this means that the very existence and mission of the Fed encourages risky behavior. This is clear from the beginning of the Fed. The Fed cannot effectively push for the enforcement of strong regulations without sabotaging its mission to endlessly expand banking, the money supply and credit. So it is clear that there is conflict of interest that cannot be resolved as long as we have our present Federal Reserve System. There is no free market in the banking industry as long as the Fed is there to shield banks from market discipline. Therefore deregulation in this context is suicide. Deregulation can only work when the market participants are fully exposed to risk and have to bear the responsibility for their decisions.

The country of Panama has no central bank. They never have for the 100 years that they have been independent. They have a very successful and stable macroeconomic environment. As s result of having no central bank their money supply has become completely market-driven. They have had some banking problems but nowhere near the crises that we have experienced. They are the only Latin American country that has not experienced a financial collapse or a currency crisis since its independence.

Panama’s inflation is always 1 to 3 points lower than the U.S. And even that inflation is caused by the U.S. Federal Reserve’s effect on world prices. They even have had some years that were deflation years. We have been taught to fear deflation. In reality deflation is a healthy function of the market. It produces adverse correctional activity for the financial markets - they lose profits. But it is good for the rest of us as prices are periodically driven downward. But our Fed manipulates markets in attempts to avoid deflationary cycles. In Panama deflation happens without the terrible consequences predicted by our government Keynesian economists. Presently the Panamanians are in their 4th year of market economic growth well above 7%. Oh well, I can at least dream.

Panama Has No Central Bank
http://mises.org/daily/2533

Regarding booms and busts prior to Great Depression: Yes we had them but I think there is some misunderstanding about them. I am putting together another post to explore our history of bank volatility in more detail.

Free Markets - Yes or No (Part 2)

Regarding the FDIC I will refer to a quote from Ron Paul in his book “End The Fed”:

There are many programs similar to the CRA (The Community Reinvestment Act of 1977) that add fuel to the fire of waste, fraud, debt, and malinvestment. Significantly contributing to he moral hazard, that is, the bad judgment, have been the FDIC, SEC, Fannie Mae and Freddie Mac, HUD rules and regulations, court orders, the IRS, and a credit card mentality (of the government) of no limits.

In one way or another so many of these efforts by government to control economy and minimize risk create situations that cause more damage to the ones they are designed to help than was anticipated. Everything needs to be evaluated not just in terms of the benefit they may bring to a few but to the over all effect including collateral damage and other unintended consequences.

Free markets do not require that participants do the right thing -- out of a sense of duty to their fellow man. The free market does, however, put effective pressure on the participants do the right thing in a much more convincing way. If they do not do the right thing, they will lose their shirts. The only way this does not happen is if some entity interferes with the market dynamics in a way that shields some participants from the risk of losing their shirts. Market participants do not have the power or ability to set up devices to shield themselves from market risks. Only government has that kind of power. And market participants constantly seek government involvement (particularly regulations) that will enable them to avoid market risks.

The market is nothing more than a tool. In the right hands (that is the hands of the public with minimal interference by government) it is a useful and beneficial tool for us to live and work and thrive in our nation. In the wrong hands --(the government as it constantly intervenes)-- the market becomes a menace to our welfare.

A free market does not mean that the participants are “free” to do what ever they want to do to unwary consumers. Quite the contrary. A free market means there are little or no barriers to those wishing to enter the market in order to compete. And competition forces the participants to “court” consumers in order to acquire and maintain market share. This “courting” of consumers means supplying what the consumers demand at prices controlled by competition. This includes any demands --goods and services --at competitive prices. A major force in the market are the demands of the consumers. Market participants have to pay close attention to this demand and craft their products and services accordingly. There is a critical difference between "real demand" and perceived demands like "demands" that are more about political expedience than about what consumers are really seeking.

AIG should have been allowed to lose its shirts. The market was “demanding” a correction as a result of risky behavior that backfired. The correction would have included the liquidation of AIG’s toxic assets as it went into bankruptcy. Instead we bailed them out and absorbed their toxic assets (paid full face value money for worthless assets). The government interfered with a necessary market function. The general public would not have been hurt as was stressed by government officials if AIG had been allowed to go bankrupt like Lehman Brothers who somehow did not rate the good graces of the government and was not bailed out. There would have been pain but it would have been limited to the financial sector and it would have been temporary. Historically, bankruptcies do very little (if any) harm to the overall economy. Instead we bailed them out and they are back to business as usual --re-inflating the bubble with the same risky financial devices to continue sucking wealth out of our economy -- heading us toward another meltdown.

Transferring that sum of money to failed institution only hurt our economy as a whole. The present level of unemployment is linked by economists to these recent and earlier redistributions of wealth by our government.

I am not an economist --not by a long shot. But some of these things are painfully obvious as long as you resist accepting the distorted information given to us by a government intent on proving that it is succeeding in its policies when in fact the opposite is true.

Our government (both Democrat and Republican) through misinformation does a good job of demonizing the market so that they can maintain a justification to continue their manipulations for the benefit of some and the detriment to many. The open and free market works best for the many. A controlled market works for those to whom the wealth is funneled as we have blatantly seen with Bear Stearns, AIG, et al. But it also happens (continually) in ways that are not so obvious but just as damaging to the over all economy. And as I have mentioned before, the Federal Reserve System is a pivotal player in this redistribution scheme.

There is so much to say about all of this. But I would rather wait to respond to what others have to say.

Free Markets - Yes or No (Part 1)

My daughter-in-law posted an article on her Face Book page about the devastation wreaked on the city of Birmingham by an out of control, predatory banking establishment.
The following is a discussion resulting from reading the article. The article is in Rolling Stone magazine and I recommend reading it before reading through the following Face Book posts.

http://www.rollingstone.com/politics/story/32906678/looting_main_street/print

The discussion turned into an interchange of ideas about our banking system, the Federal Reserve and free markets, whether or not they work in our favor. I decided to transfer the discussion to this blog to be able to more easily go into the kind of depth necessary to properly address the questions associated with this topic.

Tiny
wow. "low finance" indeed. i feel this way about my student loans, in a way, when i took them out, the federal cap was set, then years later, changed by another president. my interest seems...biblical...in how i owe MORE every year no matter what i pay. gah.
April 3 at 9:45am

Larry Enge
The large banking establishments(ie. JP Morgan et al) are out of control. They got this way by virtue of the protection they’ve had and continue to have from the Federal Reserve System. They constantly employ credit swaps, currency swaps and many other risky though lucrative money manipulations. Within the banking system is bread an attitude of invincibility and arrogance since they know they can buy their way around any restrictions and have the backing of the Fed. It is absolutely positive that they could not get away with this debauchery without the backing of the Fed. They would have to face a real market which would end the risky behavior and arrogance.

The life of our nation has always been threatened by the banking establishment. A push for a federal reserve-type central bank began immediately after our country was established. Thomas Jefferson and James Madison strongly opposed this. In spite of their opposition we finally got a central bank for a few years until it’s charter ran out. Another effort was made for a private central bank. And after much opposition another charter was granted. By the time of Andrew Jackson it was clear how dangerous it was to have central bank. So when the charter was up, Jackson vetoed the charter renewal at great personal and political expense. In 1830 Jackson prevailed and we did not have another central bank until 1913, the birth of the Federal Reserve System which is actually part of an international banking cartel.

The international “banksters” pushing for us to have central bank again finally succeeded in 1913 with the passage of the Federal Reserve Act. This bill, previously orchestrated by Nelson Aldrich, was soundly defeated under President Taft. In order to defeat Taft, the banking community backed Woodrow Wilson, and, to ensure his victory, encouraged ex- President Teddy Roosevelt to run again in order to siphon votes from the popular Taft. Wilson won by 42%, then slipped the Act through a bare quorum of Congress on December 23, 1913 after most of the opposition had gone home for the holidays. ... See More

A couple of quotes from Jefferson:

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing
power should be taken from the banks and restored to the people, to whom it properly belongs.
—Thomas Jefferson, 1802

“The banks… have the regulation of the safety-valves of our fortunes, and…condense and explode them at their will.” –Thomas Jefferson to John Adams, 1819.

As a result of the Fed the environment of the banking establishment is toxic to regular folks. Notice how Wall street (where the banking establishment lives) got the big bail outs in spite of the fact that the rest of us Americans knew it was a bad idea to bail them out. The wall street bubble is being reinflated by massive infusions through the Federal Reserve System. Yet in the rest of the world, business failure rate continue unabated. Cities, counties and states are particularly hard hit since these local businesses are a main source of revenue for these local governmental institutions. Nearly all 50 states have fallen deeply into the red over the past 5 years. The Wall Street bailouts and infusions are costing us more than we realize. They are adding greatly to the weakening of our economy as well as subjecting us to the predatory arrogance of the banking establishment.

Please do not consider what’s happening in the banking industry as an example of free market gone berserk. The banking establishment has rarely been a free market and not at all been a free market since the Federal Reserve took over the nations banking system.
Sun (4/4/10) at 2:33am

Kat
Didn't Alan Greenspan admit not too long ago that he had based everything on crazy Ayn Rand. Now he says he was wrong... about everything.
Monday (4/5/10) at 4:26 pm

Hey Kat, thanks for responding.
Alan Greenspan was conflicted -- and rightfully so. During most of his tenure he favored free markets. And yes he was greatly influenced by the Objectivism of his long time associate Ayn Rand. His conflict, however, was inevitable. He favored free markets for good reason yet he was chairman of the very institution that by its existence suspended the dynamics of the free market. The Fed’s mission as lender of last resort - in essence a safety net for the banking industry -- cancels out the major function of a free market. That function being to punish risky behavior.

It puts the Fed in a catch 22. Risky behavior in the market can be very lucrative --and it is especially attractive when you know that if you fail you will be bailed. So the Fed in order to control the risky behavior (its presence encourages) presses for regulation in the financial markets (at least so they appear to do so). Greenspan at least tried to be true to his beliefs in a free market. But deregulating a market that is handicapped, that is minus its main control apparatus ( exposure to risk) is suicide as we have seen. The problem is the existence of the Fed.

The banking industry has always wanted a central bank with the power to expand the monetary supply endlessly. During the years that we did not have one, the banks pushed very hard for a central bank because they did not like the market limitations they were exposed to.
Tuesday (4/6/10) at 12:14 am

Kat
But do you think that everyday investors are protected in a free market? How do we protect what little we have from unscrupulous bankers? (But the FDIC is different from the Federal Reserve. Do you believe in one and not the other?)

I think we've discussed this before - but I think that free markets require a certain faith in humanity that I just don't have.
Tuesday (4/6/10) at 7:50 am

I will respond to Kat's questions in the next blog entry.