The Assault on Free Markets
Those blindsided by the recent financial meltdown are now loudly blaming the free market for its failure to police its own excesses, and are calling for greater regulation to prevent future disasters. But for those who clearly observed the problems developing (in high-definition slow motion) the blame can be directed squarely at the policies of the Greenspan/Bernanke US Federal Reserve. The free market will now pay the price for government incompetence.
In US Senate hearings last week, all parties involved completely ignored the Fed’s own culpability in igniting the speculative fever. It is as if a senior prom had turned into a wild bacchanalia, and angry parents now question why the chaperones failed to notice the disrobing or why the disk jockey played provocative music, all the while ignoring the bearded gentleman pouring grain alcohol into the punch bowl.
A perfect illustration of the Fed’s failure to take responsibility can be found in Fed Chairman Ben Bernanke’s explanations regarding inflation, which he solely attributes to the effects of the rapid increase in global commodity prices. He failed to mention that commodity prices are rising as a direct consequence of his monetary policy, which is debasing not just the US dollar, but currencies around the world. Rather than accepting the blame for creating inflation, Bernanke is shifting the blame to the free market. The Senators are happy to let him get away with it as it provides more evidence to support the “need “ for more government to save the economy from the disastrous effects of unbridled capitalism.
When asked how the US got into this mess, Bernanke replied that the problems resulted from an excessive credit bubble characterized by aggressive leverage, reckless lending, and extreme risk taking. Absent from his explanation was the Fed’s role in irresponsibly setting interest rates below market levels, which mispriced risk, got the party started and kept it raging into the wee hours of the morning. The expressed goal of the Fed for much of this decade was, and is, to encourage and facilitate borrowing and lending.
During his testimony, Bernanke continued to claim that Bear Steams was not bailed out as shareholders only received about $10 per share. Of course, $10 is better than zero, which is what they surely would have received if the Fed hadn’t thrown taxpayer money around. What about Bear’s creditors though? Although the collapse of Bear Stearns would have cost bondholders dearly, the bailout essentially makes them whole.
Here again, the Fed creates even greater moral hazards by encouraging excessive risk taking. By bailing out lenders who extend excessive credit, the Fed simply invites more of that behavior. The free market must be allowed to properly price risk. Lenders need to know that when they lend money, whether to highly leveraged investment banks and hedge funds, or to overstretched homebuyers or credit card users, they risk not getting paid back. By interfering with this process the Fed simply guarantees more losses and even bigger bailouts in the future.
Also, leveraged speculators need to know that it is not “heads they win, tails the taxpayers lose”. Wall Street executives amassed fortunes by making extremely risky bets. Now that those bets have soured, why is it taxpayers that have to swallow the losses? Wall Street billionaires earn their bucks on the backs of the middle class, who made little on the way up, but foot the entire bill on the way down.
While Bernanke talked about the underlying strength of the economy, he claimed necessity in saving Bear Stearns from bankruptcy as it would have brought down the entire US financial system. How sound can the US economy be if the failure of one investment bank could topple it? Does this now mean that no more major banks or brokerage firms will be allowed to fail? Since the US has routinely accused Japan of practicing “crony capitalism” what do you suppose they should call the local version?
Not to be outdone in rewarding reckless behavior, earlier in the week the US Congress passed $15 billion in tax breaks for homebuilders, who had made their fortunes by overbuilding during the bubble and unloading their shares to a gullible public. By threatening to hold back on their political contributions, these same homebuilders are awarded still more billions. The last ones the US taxpayers should be subsidizing are homebuilders. After all, the last thing the country needs right now is more homes.
The legislation also contained a provision that offers generous tax credits to individuals who buy homes out of foreclosure. While this is billed as a benefit to homebuyers, it is just another handout to lenders, as those qualifying for the tax breaks will simply pay more at auctions as the tax breaks subsidize higher bids. The real winners are the creditors who get more in foreclosure than would have been the case had buyers not had their bids subsidized by the government.
Of course, for all the talk about taxpayer bailouts, none of the senators bothered to mention that, for the moment, no tax increases are actually on the table. Instead, the bailouts are being financed by savers, pensioners, wage earners, investors and the elderly on fixed incomes, who all suffer staggering increases in their costs of living, as the Fed uses inflation to rob Main Street to pay off Wall Street.