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.
Hmmm... I'm going to go a little off topic here, but I hope that this will all tie together.
ReplyDeleteThe 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.
Kat,
ReplyDeleteI had to create a new post to adequately respond to your really good and relevant questions. Go to "In Response to Questions 1"