AIG Anger and the Free Market Myth
What do the Easter Bunny, the Tooth Fairy, Santa Claus and the "free market" have in common? None of them exist. All the furor and flip-flopping over AIG bonuses, which supposedly violate our sacred free market principles have a fairy-tale quality about them, which mirrors the mythic, counterfactual quality of our attitudes towards market "freedom" and executive pay in general. Discussing it requires a willing suspension of disbelief, especially when it comes to Congress wanting to take its Christmas presents back.
In this Tuesday's press conference, President Obama walked an odd line around the sanctity of market freedom and executive pay, admitting that while he is "as angry as anybody" about AIG executives, and while banks and Wall Street enriching themselves at taxpayer expense is "inexcusable," "the rest of us can't afford to demonize every investor or entrepreneur who seeks to make a profit." This is a bit of a fable. Even if Congress unwisely taxed bailout-financed bonuses, it would hardly amount to demonizing all profit, and in any case, executives enriching themselves on public resources is a fundamental feature of our system.
Somewhere between Reagan and Greenspan, we came to believe the myth that outrageous executive compensation (not to mention stagnant or falling middle class wages) was a meritocracy of self-made men whose pay was determined by their value in the free market. But in reality, it represented top-heavy consumption of the fruits of a system where public sector investment and public interest regulation enables the creation of wealth.
But we just hate admitting this truth. That's the reason the AIG bonus scandal excites such emotional outbursts, and why on its surface, it doesn't make much sense.
First, we lavish billions in bailout dollars on AIG and the enabling legislation even permits use of the money for executive pay. The justification is that propping up financial institutions "too big to fail" with taxpayer money will get the "free" markets functioning again (myth #1). Then citizens understandably get angry over the bonuses, and the House passes a tax to claw 90% of them back. Members profess shock, comma, shock at bonuses for execs who allegedly brought AIG to the brink of what for any other company would have been certain bankruptcy, and how this violates the meritocracy of the "free" market (myth #2). Then President Obama demurs about the House bill, explaining that we can't "govern out of anger," can't use the tax code to punish market behavior we don't like, lest we violate market "freedom" (myth #3).
The fact is, our markets aren't free, nor should they be. The only really free markets we've seen in my adult lifetime were the Miami area after Hurricane Andrew and New Orleans after Katrina. For a day or so, "entrepreneurs" could sell ice, plywood or any other critical item for as much as they could get. Then civilization enforcement stepped in via law enforcement and shut them down.
Civilization and a truly free market can't coexist. Even those bastions of free market capitalism, the NYSE and NASDAQ can't function without myriad rules, regulations and laws, and the go-go Alan Greenspan era of market freedom was predicated upon them (in fact, the demise of some those rules, such as the SEC uptick rule repealed in 2007, contributed mightily to the current crisis).
I once asked Greenspan in person to describe his notion of a free market. In his inimitable doublespeak, he offered an oxymoronic description of a system in which "actors are free to do what they like with a minimum amount of rules and regulations." Months later he famously testified to Congress expressing some disillusionment. Whatever he once thought was "minimum" regulation, he now thinks we need much more.
We now know the "free" market rhetoric of the Greenspan era turned out to be massively destructive. It owed much to Ronald Reagan's mocking catch phrase, "I'm from the government and I'm here to help," as if government involvement was inimical to a functioning market. Once our political discourse branded government as the interfering ogre, we started dismantling the investment and regulatory apparatus, and became prone to the myth that the success of the big winners was due only to their individual skills and talent within a free market. The "free" system supposedly permitted these talents to shine without government interference. Outrageous bonuses and executive compensations came to be viewed as the natural result of the free market at work.
But that was just revisionist history, mixed up with Cold War ideology and lots of special interest lobbying. Before the Boomer era of indulgence, the government was viewed not as an adversary but a key player in economic and social welfare, whether it was the GI bill, the interstate highway system or huge federal grants for scientific research and public education. We would never have become the world's economic leader, never would have established our reputation for dynamic innovation and technological advancement, without the anti-free market monopolies enabled by the U.S. Patent Office, and thousands of other public sector investments that shaped markets by fiat.
We don't have a free market and we don't want one. A better term for what we actually have would be a private market. The term "free" market has come to diminish or denigrate the role of government, but a private market embodies the notion of government encouraging risk-taking and innovation, capitalism within civilized norms and appropriate guidelines. It is in the private market's interest to understand, respect and support the critical role the government plays in our lives. The creation of wealth, including the bonuses of Wall Street executives, deserved or not, has always stood on the shoulders of public sector money and regulation, without which we would have anarchy and poverty.
Of course, understanding that doesn't mean we are likely stop complaining about government interference in the market. But at least where AIG is concerned, maybe we can be a little less disingenuous about our outrage.
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Great stuff, how about a focus on the HUD and DOT merger to address affordability?
I don't think anyone was terribly happy about the outrageous bonuses for CEOs before the AIG debacle except for those recieving the bonuses, but now that taxpayers have to front the money to keep the people in power who contrived this mess they are getting rightfully angry. For years we've been told to fear "communism" and "socialism" and to worship the virtues of "capitalism," but now that those businesses that controlled financial markets have been disallowed to fail through taxpayer dollars and are still giving out these outrageous sums of money to the bankers who caused the mess, the anger is justified. We can now see that it was never about socialism or communism or the free market, it was always about the money--getting the most money you could however you could no matter the consequences. Most of these financial institutions will probably fail no matter how much we can delay it with "bailouts," and these bankers know this. Hence, the money grabbing outrage.
The amazing thing about real economies isn't how smoothly they run; it's that they run at all. The economy is insanely complicated, and there isn't anyone in charge. It's not even possible for one person to be aware of even more than a tiny fraction of what's going on anyway.
Yet from day to day it creaks along without total collapse and universal starvation. This fact strongly suggests that the proponents of market magic are on to something. Then there's the fact that there's an actual theorem saying that textbook-idealized markets not only produce best-possible outcomes for the technical constraints they start with, but they can produce any of the best-possible outcomes depending on the initial distribution of wealth. ("Best-possible" means that you've run into the technical constraints so that any improvement for someone has to come at the cost of making things worse for someone else.)
If you're going to make a stupid idolatrous religion of something, The Market seems like a pretty good choice. It's just that making anything into a stupid idolatrous religion at all is, of course, stupid.
We don't have a free market , not do we have justice
we have privilige
Priivi ( private) lege ( law) .... for those with money
Excellent post, and only wrong on one count.... 'Santa' is alive & well, I've been living with him for years.
Outstanding post! I think part of the problem has been that these are such complex issues; even many people with knowledge of the markets have trouble understanding how this all happened. With our drive-thru media attention span, soundbites and abstracts are about all people are willing to tolerate... can you distill this message to :30? Definitely include the Easter Bunny :)
it's not that people can't understand it or pay attention to it... this information is just not out there in the sources that most people turn to... corporate media.
it's like saying that the options that people are handed are exactly what people can handle and what people want... just not true.
Good post. Free markets mean the playing field is level and the rules are fair. They are not and everybody knows it. Over the years, special interests and corporate lobbyists have rigged the system to their favor and what is left is some kind of twisted disorganized mess.
Some people want to wave the flag of "Saving Capitalism" as if it is worth saving. If it was so great, why do we have to save it, shouldn't it have taken care of itself? Maybe it's time to move on with something a little more workable for everyone and just not those at the top of the pyramid.
In short, Charles, "we're all Bloody B*stards, given half a chance to be, and we all know this about ourselves."
When someone was handed the opportunity to swindle the entire banking community of the entire planet, they wasted no time doing it. When laws stood in the way, the laws were quietly repealed. When the con-game reached gargantuan proportions that called themselves "insurance" but were actually "gambling," an obedient legislator crafted into the law a proclamation that they were neither (and thus could be regulated as neither), and more than four hundred people in Congress raised their hands and voted, "Aye!" And it was So.
Yes, we can all see ourselves in old Jacob Marley, minus the transparent waist-coat and, of course, the ponderous chain. Anything for more money. We don't want to see that "mankind is our business." Are we all so afraid of poverty, as Ebenezer Scrooge was, that we will so willingly inflict poverty both upon our fellow man ... and, perversely, thus also upon ourselves?
Sorry, but what you described after Katrina is closer to a Black Market than a free market.
You are correct, in that we don't really have free markets, but that is because of Government Regulation already on the books. EPA, OSHA, DEQ, IRS, USDA, plus others that I can't think of change supply and/or demand equations all of the time.
The Black Market is the closest thing to a Free Market that any of us will ever hear about. You can buy pretty much anything you like, and the laws of supply and demand are purer there than anywhere else, because you can buy it, but they will charge as much as possible. The only thing about the Black Market that's not free is the fact that there's no enforcement beyond what you can pay for.
What there is IS a highly feudalistic system of wealth accumulation and retention. The "most advanced" countries, in particular the United States, still have a feudal-based social and a concomitant financial structure where the top tiers can award, and reward. themselves large shares of the financial pie. A few Western European countries and Canada have a much fairer inbcome distribution than the US, but still substantially feudal in nature.
And in lieu of royalty we have politicians, of course politicians do not mass the billion dollar fortunes like kings and queens did but they still need to raise similar sums to obtain power. So, there is no free lunch and we elect the person with the most money.....not really sure this is government of the people, by the people and for the people.
Serfs = Taxpayers
Nobility = CEO's
Royalty = Politicians
Can anybody tell me how this system worked out last time?
I think your classification is a little off:
Serfs = Taxpayers
Nobility = Politicians
Royalty = CEO's
Is closer to my interpretation, as the nobility work in the service of royalty, and surely our politicians are in the pockets of Wall St. CEOs.
As for the "system" you mentioned, it's more of a repeating pattern that has been imposed on a variety of systems throughout human history; we are still trying to progress beyond it, but so far, no dice....
If they really believed in the principle of free trade, then why did they make it a Federal Crime for Gramdma to import her medicine from Canada?
It is all about special interests forcing the consumers to pay more and get less.
"Free Trade" means unbalanced trade. Free trade bankrupted America by shifting a majority of our manufacturing jobs away. No factories means no jobs. No jobs means recession.. No manufacturing means the factories creating wealth are now in China and we must borrow an additional trillion dollars from them.
The first results is are coming home to roost.
Recession turning into Depression
Lack of credit to keep our economy going
US a debtor Nation dependent on China
Dollar destruction is next. China wants to stop buying Treasury Bills because the dollar is not backed by a sound economy that actually creates the wealth that must be repaid. The reason we do not create wealth is because our factories have been replaced by factories in China due to "Free Trade". Next step China will push for the creation of an "Uber Currency" based on a basket of currencies. Obviously, China will stop buying dollar denominated US T Bills and instead lend the US government billions of the new Ubercurrency. The result will be the US will have to pay back the loans in Uberdollars and will not be able to just print them up out of thin air. When the dollar loses it's defacto status as the world currency, then governments will unload their foreign reserves of dollars. Stand by for this escalating into a slide in dollar value, then a panic to dump dollars.
In other words, like I and others like myself have been saying for YEARS, there's no such thing as a free market!! There's capitalism, and then there's the regulated capitalism that works with society.
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