The 'Market' Isn't So Wise After All

As I read the last tranche of disastrous news stories from this catastrophic year, I found myself thinking back to the old days when it all seemed to work, when everyone agreed what made an economy go and the stock market raced and the commentators and economists and politicians of the world stood as one under the boldly soaring banner of laissez-faire.

In particular, I remembered that quintessential work of market triumphalism, The Lexus and the Olive Tree, by New York Times columnist Thomas Friedman. It was published in the glorious year 1999, and in those days, it seemed, every cliché was made of gold: the brokerage advertisements were pithy, the small investors were mighty, and the deregulated way was irresistibly becoming the global way.

In one anecdote, Mr. Friedman described a visit to India by a team from Moody's Investor Service, a company that carried the awesome task of determining "who is pursuing sound economics and who is not." This was shortly after India had tested its nuclear weapons, and the idea was that such a traditional bid for power counted for little in this globalized age; what mattered was making political choices of which the market approved, with organizations like Moody's sifting out the hearts of nations before its judgment seat. In the end, Moody's "downgraded India's economy," according to Mr. Friedman, because it disapproved of India's politics.

And who makes sure that Moody's and its competitors downgrade what deserves to be downgraded? In 1999 the obvious answer would have been: the market, with its fantastic self-regulating powers.

But something went wrong on the road to privatopia. If everything is for sale, why shouldn't the guardians put themselves on the block as well? Now we find that the profit motive, unleashed to work its magic within the credit-rating agencies, apparently exposed them to pressure from debt issuers and led them to give high ratings to the mortgage-backed securities that eventually blew the economy to pieces.

And so it has gone with many other shibboleths of the free-market consensus in this tragic year.

For example, it was only a short while ago that simply everyone knew deregulation to be the path to prosperity as well as the distilled essence of human freedom. Today, though, it seems this folly permitted a 100-year flood of fraud. Consider the Office of Thrift Supervision (OTS), the subject of a withering examination in the Washington Post last month. As part of what the Post called the "aggressively deregulatory stance" the OTS adopted toward the savings and loan industry in the years of George W. Bush, it slashed staff, rolled back enforcement, and came to regard the industry it was supposed to oversee as its "customers." Maybe it's only a coincidence that some of the biggest banks -- Washington Mutual and IndyMac -- ever to fail were regulated by that agency, but I doubt it.

Or consider the theory, once possible to proffer with a straight face, that lavishing princely bonuses and stock options on top management was a good idea since they drew executives' interests into happy alignment with those of the shareholders. Instead, CEOs were only too happy to gorge themselves and turn shareholders into bag holders. In the subprime mortgage industry, bankers handed out iffy loans like candy at a parade because such loans meant revenue and, hence, bonuses for executives in the here-and-now. The consequences would be borne down the line by the suckers who bought mortgage-backed securities. And, of course, by the shareholders.

At Washington Mutual, the bank that became most famous for open-handed lending, incentives lined the road to hell. According to the New York Times, realtors received fees from the bank for bringing in clients, mortgage brokers got "handsome commissions for selling the riskiest loans," and the CEO raked in $88 million from 2001 to 2007, before the outrageous risks of the scheme cratered the entire enterprise.

Today we stand at the end of a long historical stretch in which laissez-faire was glorified as gospel and the business community got almost its entire wish list granted by the state. To show its gratitude, the finance industry then stampeded us all over a cliff.

To be sure, some of the preachers of the old-time religion now admit the error of their ways. Especially remarkable is Alan Greenspan's confession of "shocked disbelief" on discovering how reality differed from holy writ.

But by and large the free-market medicine men seem determined to learn nothing from this awful year. Instead they repeat their incantations and retreat deeper into their dogma, generating endless schemes in which government is to blame, all sin originates with the Community Reinvestment Act, and the bailouts for which their own flock is desperately bleating can do nothing but harm.

And they wait for things to return to normal, without realizing that things already have.

Thomas Frank's column, The Tilting Yard, appears every Wednesday at OpinionJournal.com

Also in Opinion Journal:

Paul H. Rubin: Instant Info Is a Two-Edged Sword

Michael J. Totten: Kosovo's Moderate Muslims

Comments

[marijam]

Must read:
Risk Management [on Wall Street]
http://www.nytimes.com/2009/01/04/magazine/04risk-t.html

[Social Construct]

Thanks for the link. Very informative .... and frightening to boot!

[Social Construct]

I have tried and tried to study how the financial markets work, or worked, and, in my mind it keeps being summarized as a very convoluted form of gambling with Ivy League educated labels used to construct smokescreens for ever riskier betting. Maybe economics classes that deal with financial systems should carry a subtitle: Overly Complicated Bookmaking.

[castlerider]

Great post... It's so encouraging to see posts like this so people can get it through their impossibly thick skulls what's really been going on.

It's also amazing when you begin to realize how hard rightwing plutocrats have ALREADY worked to secure their positions and protect the rich elite.. - None probably as damaging as the right's filling their pockets as they get companies to fork millions to buy State Supreme court judges, often having selected them well before they even gave running as a judge a passing thought.

These judges always vote to dismiss a case for companies facing litigation for misdeeds against the public. It's horrendous. Many townspeople have lost big against polluters, winning their lawsuits, then dying in appeal at state supreme court.
A huge example is what happened to the people afflicted by the Exxon-Valdez in Prince William Sound in Alaska. AFTER 20 YEARS, a righteous verdict awarding 2 billion dollars, our bought Supreme Court handed Exxon the peoples' heads on a silver platter, knocking it to 500 Million. Although Exxon-Mobil posted 30 billion record profits of over the last 4 years!!
Ever wonder what that "dear in the headlights" look was when Katie asked Sarah Palin what Case decisions she didn't agree with?? -The maven was wondering "Should I mention my people who got screwed by EXXON? Hmm- better not.- that wouldn't be a good republican."
Wake up people. Republicans'll screw you at every turn. It's always about the money.

[jbatch]

The obvious question you raise, Mr. Frank, is why do the free-marketeers adhere to this philosophy in the face of so much evidence that it doesn't work.

The answer is, they don't. Oh, no doubt there are a few disconnected academics who actually believe the free-marketeer BS. But the vast majority are selling snake oil, and they know it.

Republicans and their patrons hope they can convince us yet again, that unconstrained free markets are a good thing for everybody. If they succeed, the corporate fat-cats get to fleece us yet again, and the Republican plutocrats get to regain power.

The point is, Republicanism is nothing more than the political arm of the fat cat fleecers. They court -- but only tolerate -- the company of evangelicals; racists; the abjectly ignorant, fear-stoked xenophobics, and assorted other whack-jobs not because they share their beliefs or represent their interests, but because they are easily fooled and because they are needed to keep power.

You did a good job of naming the beast in "What's the Matter with Kansas?" Don't let up now. Make the Republican ploy transparent; shine the sanitizing sun on their ploy and they whither and die like a vampire in daylight.

[DuganS1]

The Republicans don't believe in "unconstrained free markets." That type of mentality fetters much more so among libertarians and Austrian economists. Considering how much government spending Republicans have done and the amount of intervention they've done in the markets, I find the idea that they support unconstrained free markets pure craziness.

[Chavez08]

A truly Free Market is not possible. America was wide open market in the 19th century and this bred robber-barons, predatory banking and rampant, destructive Industrialization and "trusts" that put Americans in poverty and hopelessness until the market crashed in '29 and the wealthy aristocracy felt the pain, forcing free market failures into the history books.

The Soviet Empire became a Free Market petri-dish, as if laid-out by Mises himself. Yeltsin stood back and allowed the market forces to do what they wanted. They did and turned Russia into a near depleted wasteland to the point the people were soon crying for Stalin to come back.

I am with you in that I don't believe the Republicans allowed for a truly free market though they freed it up for most things that didn't affect their own monoplies (the banks). Also, I would relish the day I could start my own business without paying some useless bureacrat my first years income in taxes and not have to worry about ambulance chasers. But the reality is that human nature and history are the biggest enemies of the Libertarian argument.

If Libertarians could stop denying and address the previous failures and tell us how the past could not be repeated and the current monoplies, govts. that own the infrastructure, technology knowledge and trade routes necessary for a free market to work would release their holds to the public, I would be with you.

Until then, I throw in with Keynes.

[Chavez08]

Overdog - "Brute force and violence" was the preferred tool for bankers and their Republican henchmen to pry-open foreign markets and exploit, kill people in order to make cheap widgets and pump free oil.

Ask the *free* South Americans if it was wine and roses that Reagan brought down with the "School of the Americas"

Ayn Rand, Friedman, Mises were all total losers in the fact that they had nothing else to offer but re-packaged neo-classic economic myth that had been proven BS time and time again in history.

"Free Markets" = "Enslaved People"

[sixx]

No matter how many years of catastrophic failures they produce, the disciples of Friedman, Friedman and Laffer will not go away easily. Garlic and sunshine are a good start, but driving a wooden stake through their hearts is the only solution.

This may not work as there is already evidence that 'free-racketeers' return as the un-dead and walk the flat earth, trickling down on the living.

[Chavez08]

Weekly Standard, AEI, Heritage, etc. are doing double-duty passing their Friedman snake-oil on CSPAN whenever they can get a window. I wonder if these banker-puppets lie this much in their personal lives, it's pretty pathetic.

You're right, - the "Free Market" thieves are not going away quietly even though they have less credibility than Baghdad Bob"

[schatsie]

The Heritage will never give up their CHARITABLE STATUS as they keep pushing the free market/cry baby capitalist model.

[Donkeykick]

(Quote:) But by and large the free-market medicine men seem determined to learn nothing from this awful year. Instead they repeat their incantations and retreat deeper into their dogma, generating endless schemes in which government is to blame, all sin originates with the Community Reinvestment Act, and the bailouts for which their own flock is desperately bleating can do nothing but harm. (Unquote.)

Every time these rich people portray their ignorance on this, they are endorsing socialism. What makes me laugh is, they don't even know this.

[Chavez08]

30 years went by and not a single "mainstream" journalist noted human nature or U.S. history in an analysis of Neo-classic economics.

We didn't have to re-learn the lessons of "Free Market" in the late 20th Century. We were failed by deceptive corporate "journalists", corrupt academics and an extremely ignorant American public.

[jbatch]

I wrote an article entitled "The Myth of the Magic Markets" in 2000 and submitted it to several progressive magazines -- none wanted to touch it. Other things I wrote got picked up by the Washington Post, the Baltimore Sun, the San Jose Mercury News -- as well as several wonk journals so it wasn't the writing that put them off, it was the subject -- free markets were a national religion and criticizing them was an act of sacrilege.

There were cogent critiques that made it into print -- including Mr. Frank's "What's the Matter with Kansas," and a couple of books by Greg Palast, but these were books. The rest of the media, for the most part, either bought the dogma hook, line and sinker, or they hunkered in fear before the alter of orthodoxy.

[jeffrey678]

DEREGULATION = LICENSE TO STEAL

[leftLibertarian]

And be bailed out by Congress. Open your eyes. The Democrats fought hard for the bailout.

[BarryChamplain]

Every time I read "the Democrats are just as much to blame!!" I get the feeling we're supposed to shut up and walk away humbled. Yeah, ending the conversation there is really going to help.

Look, the Republicans are SUPPOSED to be the party of greedy white men, the Ruling Class, if you will. They're SUPPOSED to game the system, and steal from a supportive middle class, until the ache in the middle class' collective anal aperture becomes too much, and then the people go to the polls and elect a "Democrat" or two. And they stay for a couple of terms, until our infantilized, TV-watching public wants its "daddy" back. And on and on.

Meanwhile, progressive movements slog on, despite mainstream p.r. to marginalize them. The only hope they have of effecting SYSTEMIC change is to GET INTO THE GOVERNMENT. Via elected office. And with the MSM working overtime against such candidates, this ain't easy (Dennis Kucinich may be a Congressman, but if the MSM has anything to say about it, he'll remain a comic figure until he finally goes away).

The only political party within which progressives can possibly work is the DEMOCRATIC Party. Yes, we're aware that the lion's share of congressional Democrats are Blue Dogs and just plain whores, but if you trash the Democratic Party as an institution, progressives will have nowhere to go in order to change the complexion of said Party, and gain a cockpit from which to pilot real change.

[ShakeYourComplacency]

Good article, Thomas. I suggest you click over the Jacki's blog contribution, describing the halo around Paulson's head and what good people the Goldman Sachs partners are. I didn't know if I wanted to throw up, or go hang myself, because if THAT is still the prevailing view, that good people got caught up in some bad decisions and unfortunate events, then we're all in bigger trouble than I thought.

None of this was an accident, and none of this was brought on by the well intended efforts of good men. Anyone who thinks deregulation was a good idea, and taking the teeth out of agencies that kept greed in check and ensured the solvency of corporations was a good idea, they were obviously in line to directly benefit from it.

You could easily look at the political and financial systems we had and see a sickness there: Prior bank bailouts, enron, etc. If you don't want to look there, you could easily look at the rest of the economy. If you did look, you saw a diseased nation. You saw a generation doing financially worse than their parents. You saw a shrinking middle class, a real decrease in wages, busted unions and inflation. This should have been alarming, but it wasn't, and somehow still isn't. There's still that philosophy that as long as the rich are doing well, then all is well. And that's exactly why so far the "solution" has been to throw money at rich people.

[krocklin]

I made a comment to the Post by Jacki you refer to. I basically said her views were naive, though she qualified them a lot in response to many posters like me.
Many asked why Paulsen would take the job when he had to sell $700 million worth of stock. Maybe he knew that was going to be a good move?
Such insiders plan big moves like that all the time because they can anticipate the big Crash that small investors cannot.

[schatsie]

Paulson got a tax break that you and i will never see, more than the results of any lottery unless it is over 200 milllion,,,,that is the tax break, not the income...

[tracer289]

The public needs an economic education now more than ever. And this is why I was excited by the title but disappointed by the contents.

Even in a free market, business men and entrepreneurs make mistakes. Employees lose jobs. Bankrupts happen. But in a free market "business cycles" do not occur. Under a free market we do not have boom and bust cycles. That symptom is 100% unique to a political economy. As other posters here have said,
1. we are not practicing a free market economy and have not been since 1913, despite the retoric
2. every society with a fiat currency eventually went bankrupt, we're next in line
3. economic indicators are set by the market, you and me, rather than a central planner.

Unlimited deficit spending, on the govt and individual level, profligate consumption, spend spend spend, does not create a healthy economy.
Only productivity generates wealth.

mises.org

[RoloTomassi]

Your nonsense is disappointing, but typical, and very revealing. It's misdirecting apologist folks like you among us who can do the most harm now, clutching your Friedmanite rosary and chanting away, awaiting the day when your "true free-market" messiah will arrive.

The the likelihood of that happening is the same as the 2nd coming of Jesus or the realization of the perfect model of Communism as imagined by Marx--believe it you like, but you have NOTHING but your own faith to back up your argument.

Give up your financial religion and embrace truly logical economics--which happens to be a deeply regulated Keynesian model--and kick your true-believer nonsense to the curb. Free market fundamentalism is purely a faith-based load of crap, and anyone embracing it is as delusional as any fundamentalist christian bible-thumper or hardcore marxist.

[DuganS1]

Of course there are business cycles that occur in a free market. Look at how many business (boom-bust) cycles there were in the 19th century and early 20th century before the Federal Reserve was created. Second, if every society with a fiat currency is going to go bankrupt, that means every single currency in the world is going to go bankrupt because all currencies are currently fiat currencies. Going back to a pure gold standard is ridiculous as that would mean the health of our entire economy might become completely dependent on how much gold they can get out of mines in Russia, Indonesia, and the Congo in any given year.

[Chavez08]

Well, we've had several years of record productivity gains and negative wealth. Greenspan,being a friend of Rand and admirer of Mises, did his very best to whitewash the fact that, in spite of all the productivity gains, Americans were going negative in wealth: "..recent job loss is apparently inspired by productivity gains and gains in technology though any trends toward protectionism must be thwarted and reversed..." Alan is currently attempting to articulate his mea culpa to fit his trademarkn verbo-hieroglyphic style...

The only outcomes of the "Free Market" are endless war, slave labor, environmental armageddon and the relentless concentration of wealth to 1% of the population. But rest assured, Libertarians never let facts get in the way of their ideology.

[TaxTheRichNow]

In addition to Tom Frank's "The Wrecking Crew", an excellent pair of books I'm making my way through are Nassim Taleb's "Fooled by Randomness" and George Cooper's "The Origin of Financial Crises". Taleb amusingly describe brokerage house economists as "entertainers". Both take dead aim at the profession of faith as laid down by the Holy Prophet Milton Friedman and his blessed disciple Alan Greenspan: "The Market is the Holy of Holies and is perfect in all its aspects. Praise be to the Market which bestows perfection upon the economies of men. Bow down and Worship the Market and its Profits".

Cooper disposes of the dogma of the "efficient market" in short order, and then compounds his blasphemy by citing Hyman Minsky and John Maynard Keynes as economists who genuinely understood market instability. It's looking more and more like the infidels will sacking the Temples of Mammon on Wall Street. Good.

[whitebird46]

Have you read Naomi Klein's Shock Doctrine? It takes many of Frank's concepts a step further by showing how unplanned and planned crisis have led governments worldwide to accept Friedman's mantra of free markets, privatized public services and the destruction of labor unions which eventually caused what we are now seeing in the U.S.

[tomas0808]

This is God's way of returning some value to a persons physical labor. There's something inherently wrong with a system that rewards cronyism, that rewards people who don't create anything useful and just know how to manipulate numbers. They were caught up in it and I understand that, but I think it's gonna keep falling apart until we get house prices back to where they should be, about 1/4th of what they are now. If home prices had been tied to the general inflation rate in the 60's we wouldn't have this problem, that house that's half a million would be 125,000.

Or if you figure the inverse, if wages had increased at the rate of housing the minimum wage would be 70 bucks an hour. Think about that. The banks and investors, not the workers, were the ones who made out like bandits the last forty years, the workers had to take out bigger and longer loans and they could rake in the dough sitting on their asses. And then they kept us pacified with every sort of distraction and addiction imaginable. We seemed to be incapable of changing things via the system or having a revolution so God intervened.

[Viper]

YOUR numbers are way off...

First the cost of building a house is well over $100 bucks a sq foot... before you get to the land under it. For houses with the best material... granite, tile or slate roofs it can run to $300 per sq foot.

Housing in Florida have been selling below builder cost for 12 months... below their 2002 prices in many cases. Thye cant be built for what they are selling for now. When that inventory is gone...

If houses lose 75% of their value then every owner would be upside down .. mortgage far greater than the house is worth.. they will all walk and the Finanical crisis will grow even larger. Property taxes will have to be increased. In Florida we have seen 50% declines... so if you own what was a 300K house.. its now worth 150K... but you have a 240-270K mortgage... The advice I have to give when asked as a retired CPA is to walk. A 3-4K mortgage vs 1K rent.

Economies need inflation of 2-3% per year by the way.... they cant tolerate deflation of 2-3% per year because no one buys waiting for an even lower price...

Min wage forty years ago was 1.25... so your saying that houses inflated at a rate of 50-60 times? Really... such that a `1965 house that cost 25K then, today would cost well over 1.25 million.


Regards

[Viper]

70% of americans have no networth. Of those that have networth, their house is 60% of it and dropiing very fast these days..

The Government by devaluing the dollar and the spending it will do to restimulate/inflate and the massive debts will further devalue the dollar in order to reverse the deflation we are now having. Housing prices will go back up because the material cost will rise rapidly in a few years since a cheaper dollar will buy far less.

Of course wages will not rise and keep up if we dont start making stuff here in the US! and say good bye to mindless free trade and outsourcing.

Housing at this point in many areas is as low as it can go w/o every house being a foreclosure and thus a depression...

Regards

[tomas0808]

I think it's safe to call 'the market' our enemy

[Overd0g]

It is the enemy of those that worship brute force and violence.

[FreedomBeforeDemocracy]

Does this author believe it is wise to "encourage" lending institutions to make loans to people with poor credit? Is it wise to rapidly pump up asset values in the short term and then just as quickly bring them back down? Is it also wise to take resources from healthy companies (or careful citizens) and give them to failing companies (or irresponsible citizens)? The free market may not be "wise", but I"ll take it over the alternative (political market) anytime.

[Rogan]

You seem to be very confused...