Bailout Time: Where are the Free Marketers?
People across the political spectrum are now running to the government demanding that it rescue the banks and financial industry from the fallout from the collapse of the housing bubble. Some are running to the front door, demanding that the government buy up or guarantee tens or hundreds of billions of dollars of bad mortgage debt. Others, specifically the big New York banks, have gone to the backdoor and are getting hundreds of billions of dollars in cut rate loans from the Fed in secrecy through the Fed’s new “Term Auction Facility (TAF).”
With so many people on all sides of the political spectrum desperately seeking the government’s help, those of us in the sidelines have to ask: “whatever happened to the free market?”
We remember all those lectures about how important it is to remove protective barriers for U.S. manufactured goods like steel, cars, and textiles. The smart people who teach economics and write newspaper columns and editorials told us repeatedly how U.S. workers would just have to adjust to the global economy. If they couldn’t make a living doing what they were doing, then they would have to either learn a new skill or work at the minimum wage in a fast food restaurant. Protectionist barriers were bad for the economy and therefore out of the question.
They gave a similar story when it came to welfare reform back in the mid-nineties. Mothers receiving welfare were told that they had to learn to work for a living. While there were promises of work supports in the form of child care, health care, and housing assistance, the government never seemed to have enough money to be able to provide the working poor with a decent standard of living.
But, now that the people who are hurting are the Wall Street financial types -- people who make tens of millions, or even hundreds of millions, a year -- the government cannot possibly move fast enough to rescue those in need. They want the government to write blanks checks that could even exceed a trillion dollars (who would even ask about a price tag at a time when so many rich people’s finances are at stake?) to keep the richest people in the country from losing their shirts due to their own incredible negligence and stupidity in managing the country’s largest financial institutions.
A couple of years ago I wrote a book called The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (available here for free download). The main point of the book is that the conventional framing of public policy debates as counter-posing liberals/progressives, who support government intervention, and conservatives, who support markets, is nonsense. Conservatives are every bit as happy as liberals to have the government intervene in the market. The difference is that conservatives want the government to intervene to redistribute income upward, while progressives want the redistribution to support greater equality.
It looks like the conservatives are working overtime to prove me right. They are rushing to the halls of Congress and the Fed demanding that the government rescue them from their own stupidity. The rich own enough politicians and have enough influence that they very well may get their bailout.
But we should be sure to have our cameras out. The next time they try to tell us that we can’t raise the minimum wage or help displaced workers or troubled industries, because that would interfere with the market, we should show them the pictures of the Wall Street crew stuffing their pockets with taxpayer dollars. The rich have no problem with government intervention, they just disapprove of intervention that doesn’t help them.
The agencies and the insurers were not alone; the Federal Reserve was asleep at the switch, and the financial press (including me) failed to sound the alarm in time. Deciding who was most to blame is difficult, if it is worth the effort at all. Floyd Norris 3/08/2008
March 10, 2008 1:50 PM | Reply | Permalink
Why do we have to wait for "next time?" Surely we have sufficient examples (documented in your book) of what happened "last time" (and all the previous times going back to the beginnings of banking and financial markets in general).
This is the time we should call them on it - but we won't (again) like we never do and have never done since the beginning of the republic.
I think Galbraith's book "A Short History of Financial Euphoria" is still the best on this topic.
March 10, 2008 1:54 PM | Reply | Permalink
Didn't Andy Jackson "call them on it" -- and plunge the country into a depression to boot?
March 10, 2008 2:03 PM | Reply | Permalink
The gang that hates "big government programs" is pleading for a "Big Government Program".
Ho-hum, some things change but nothing ever changes.
March 10, 2008 3:04 PM | Reply | Permalink
"Free market"? Ffft. The percentage of corporate leaders who honestly believe in a truly free market is probably even less than the percentage of people in high public office who honestly believe in God. It's lip service.
If we were actually thrust into a for-real free market, most corporatists would starve to death.
March 10, 2008 3:11 PM | Reply | Permalink
Protectionism is bad only when it isn't your ass that needs protecting. Strikingly similar, intervening in foreign countries is bad unless this principle is standing in the way of your objectives. Conservatism has been assaulted, battered and left to rot. There are no conservative principles any more, just opportunists who fly the flag.
March 10, 2008 3:21 PM | Reply | Permalink
See hilarious sketch by Bird and Fortune: http://www.youtube.com/watch?v=hXBcmqwTV9s
March 10, 2008 4:16 PM | Reply | Permalink
There is no free market without regulation. Without regulation and oversight someone always gets screwed. Funny how it always ends up being the little guy. The banks will get money from Dubai or Saudi Arabia; the homeowner will be homeless.
March 10, 2008 9:05 PM | Reply | Permalink
This might be a good time to put supply side economics to the test - again. If lowering the tax rates increases revenue, wouldn't lowering the interest rates on these mortgages and credit cards work the same way? The banks, credit card companies and mortgage institutions lower the interest rates they've been charging the consumers, and presto, just like revenue increased for the government, revenue would increase for the private sector.
Let the air out of some of those balloon payment loans, lower those credit card interest rates from 18% to 5%, reduce those mortgage payments by pegging them to the borrowers' monthly income. Instead of trickle down they could call it pissing up.
March 10, 2008 9:28 PM | Reply | Permalink
Dr. Baker,
I am a free market conservative, I am not a rich Wall Street banker, and I have to question your thesis. I believe you are confusing two issues. The first is the belief that free markets are the best way to allocate scarce resources and simultaneously preserve individual liberty. Every serious free-market conservative thinker has consistently and articulately defended free-market principles, whether it is in opposition to government wealth transfer via social welfare, or government wealth transfer via bailout of corporations. How quickly you have forgotten the opposition from free-market conservative that Bush received when he enacted steel tariffs in 2002, for instance. (And no, I do not claim Bush is in any way a consistent free-market conservative.)
The second issue that you address is the problem of rent-seeking behavior of any corporation via government bailout. Indeed, this is Exhibit A in _favor_ of the free-market conservative's thesis: when you have a large and powerful government, able to dole out favors and cash at will, then what invariably happens is that institutions, which could not survive in a truly free market, seek artificial support to prop up their failing business model, while doing tremendous harm to the marketplace in the meantime. I would be thrilled if government never bailed out any corporation ever again, because that would mean corporations would have to sink or swim based on their performance in the marketplace - i.e., compete in a free market - and not based on how well they can solicit favors from the government.
So, what you appear to have done is deliberately conflate these two issues together to make it appear that free-market conservatives are just a bunch of raging hypocrites who are now demanding a bailout because it's their ox that is now being gored. In fact, most of your article consists of little more than an ideological rant against free-market conservatives. You even claim that "conservatives want the government to intervene to redistribute income upward." This is complete nonsense. I haven't yet read one article or one book or heard of any serious free-market conservative who wants the government to deliberately transfer wealth to the rich. What you do do, however, is prove the free-market conservative's point: the way to avoid rent-seeking behavior by anyone, whether it be a corporation or not, is to not tempt them by dangling cash in front of their eyes.
March 10, 2008 9:56 PM | Reply | Permalink
Oh, those rent-seeking bad boy businessmen.
When ever will they stop handing money to the Republican Party and demanding government subsidies and favors in return? When ever will they return to the true path -- the tao of true free-market conservatism?
Dream on, Grasshopper!
March 10, 2008 11:14 PM | Reply | Permalink
Ellen,
Well, let's see...a brief review of the disclosure data on fec.gov reveals that, for this election cycle:
1. Morgan Stanley Political Action Committee has given money to candidates of both parties, including $30,000 _each_ to the NRCC/NRSC and the DNCC/DNSC; more to R's than to D's, but some prominent D's are on the list, such as Harry Reid, Barney Frank, and John Dingell.
2. The Bank of America PAC has given $15,000 each to the RNSC and DNSC; again, both D's and R's are represented on the list.
3. J. P. Morgan & Chase PAC has given both to D's and R's, with D's on the list such as Ken Salazar, Harry Reid, Nancy Pelosi, Patrick Leahy, Mary Landrieu, and Dick Durbin.
Should I go on? It seems pretty clear that the big bank PACs donate to both sides. I'm not saying it's equal, but it certainly seems to be an effort to hedge their bets.
And I'm not seriously suggesting that corporations will someday become prophets of laissez-faire capitalism and refuse government subsidies. Think about it: if you can achieve a competitive edge by getting a special dispensation from government, why wouldn't you do it? The challenge is for government to refuse to offer the handouts in the first place, DESPITE the requests by corporations, and that is what I strongly support. I hope you would too.
March 11, 2008 1:28 AM | Reply | Permalink
I think you miss the part where governments create markets, thereby are required to participate and sustain them. Little or Big.
Your free market-ism will never rid us of a standing military, and national infrastructure (primarily supporting aforementioned military) Case in point would be that all modern city planning is based on the original military model: large avenues to access key areas also known as military axis.
The government is in the business of power/control (writ defense) and that costs money, dammit. From there all else flows.
March 11, 2008 1:51 AM | Reply | Permalink
Krugman
The revolution won't be televised. Actually it won't be getting out of the tub to pick up the razor it dropped on the floor.
Even more prescient: The blood on the spreadsheets is still drying.
We The People will get to take that to the bank as they say.
Viva la Clinton.
March 11, 2008 1:44 AM | Reply | Permalink
It's simple. We have free market capitalism with all its attendant risks and uncertainties for the poor and middle class, and socialism, with its protections from unforeseen and disastrous problems for the rich.
Now that seems fair, doesn't it? No??
March 10, 2008 11:27 PM | Reply | Permalink
Thank you for a good chuckle. Spot on.
Finally - a great solution to the housing crisis.
March 11, 2008 1:32 AM | Reply | Permalink
That was to BevD somehow.
March 11, 2008 1:45 AM | Reply | Permalink
Privatize profit, socialize debt. Thus has it always been...
March 11, 2008 8:52 AM | Reply | Permalink
chemjeff, please name me any country that has ever practiced true free-market capitalism. Hint, there were 2 prior to WWI.
March 11, 2008 2:25 AM | Reply | Permalink
The liability of American bank shareholders should be limited to 100% of the original value of their investment. For a change.
March 11, 2008 2:28 AM | Reply | Permalink
"We the People of the United States, in order to form a more perfect Union...promote the GENERAL Welfare..."
I wonder what the definition of 'general' was in 1787. As a matter of fact, i wonder what they meant by promote.
He who control the definitions has all the power...He who has the power controls the definitions...damn!
March 11, 2008 8:18 AM | Reply | Permalink
I think Bev D is onto something, in order for everyone to feel the pain of a bailout the washington gang should make all the credit card people revert to a fixed low rate depending on credit score then the washington gang can enact a 1% income tax raise so that in the end the banks and their buddies share the pain right along with us.
March 11, 2008 10:15 AM | Reply | Permalink
Rather than go thru the financial dislocation of a lot of innocent people, by watching, as you suggest, the demise of these large corporations, why not simply regulate this stuff the way it used to be such that these guys get caught BEFORE the BIG TROUBLES.
For some reason, regulations in our economic life are opposed by your side.
March 11, 2008 11:21 AM | Reply | Permalink
this was supposed to be a response to 'chemjeff', but what the hell. You guys could improve on the way this all operates.
March 11, 2008 12:35 PM | Reply | Permalink
Davcbr,
Precisely what form should this regulation take? That lenders cannot offer ARMs? What if I really want an ARM and I can afford it? That lenders can only offer mortgages at a certain interest rate? What if I really am a credit risk and it wouldn't make financial sense to charge me the same interest rate as, say, you might be charged? The point is, no matter how clever legisators might be able to craft regulations, you can always find an individual that would be unduly harmed by that regulation.
So the real question is, should the government write regulations that only protect the majority of cases, which knowingly leave some individuals out in the cold, or should the government instead refrain from writing regulations, thereby permitting individuals to take part in the maximum possible range of opportunities, with the understanding that some of those individuals may be unintentionally harmed by their choices or even by events beyond their own control? You can probably tell where I fall on this discussion.
March 11, 2008 3:00 PM | Reply | Permalink
Chemjeff, take it as compliment that many of the readers have responded to your comments with some questions of their own as a rebuttal, and now here is mine; Your point of bringing in the financial contributions of some of America's largest financial institutions is something that I think does deserve some attention. Unfortunately for this arguement I find it a distracting fact because I would imagine that most businesses who find the need to contribute to a PAC would be unwise not to invest money to both D's and R's. Essentially they are putting money on the table so that those elected officials on both sides of the aisle will have an ear for there cases in the future. Of course as I said this gets into the whole involvement of election financing and the public's trust in those elected taking contributions from private industry. That is for another thread.
In regards to DrBaker's claims, i do not think that your position or opinions are inwanted here. In fact I would imagine that many americans are interested in uderstanding the factors which put us inot the situation we find ourselves. I think it is obvious that both you and DrBaker agree that there should not be a bail out of these financial business, right? I believe that what DrBaker is clearly pointing to is the hypocrisy of the crowd that complains about social institutions and any sort of socialization wihtin the framework of America wile at the same time then asking for help when the bottom drops out. But I expect businesses to act this way, as they are in the business of themselves and I would imagine will use what ever legal means necessary to save their own skin. Do you agree? Are the companies not seeking a bail-out from our government as we speak?
March 11, 2008 12:54 PM | Reply | Permalink
JoshQuasimoto,
Thank you for your kind words. I only brought up the political donations of a few big banks to rebut the point made that banks are somehow populated by ideological conservatives and hence only donate to Republicans. That is simply not the case. I posit that all corporations will, given the opportunity, not hesitate to shift costs to the government in an abandonment of free-market principles.
And I realize that Dr. Baker's point is one about hypocrisy. But my point is that the hypocrisy here is rather limited, precisely for what I outlined above - banks are not ideologically conservative, and banks haven't been the ones making the ideological and academic arguments in favor of free-market conservatism. That's been the job of conservative thinkers like Thomas Sowell, Walter Williams, and the like. THEY aren't the ones demanding a government bailout of the banks. So where is the hypocrisy, precisely?
March 12, 2008 12:16 AM | Reply | Permalink
I love Bevd's suggestion for the great piss up. Makes more sense that trickle down ever did.
Seems to me that the "Great Invisible Hand" of the "free market (as if such a thing existed)" has been caught hiding in the corner wanking to the siren song of deregulation.
March 11, 2008 1:23 PM | Reply | Permalink
“Term Auction Facility (TAF)” So very yesterday! Hello, Term Securities Lending Facility (TSLF)!
Got AAA RMBSs? Step right up and get your money!
March 11, 2008 4:22 PM | Reply | Permalink
Krugman, I think, noted that Bernanke is treating this as a run on the bank and that his "slap-in-the-face" therapy might work. Certainly the stock market thinks so. But he also noted that such therapy is likely to be of short-term value only.
A fiat money, fractional-banking system has inherent disadvantages and instabilities...but we are not going to abandon it because its advantages are so great. We cannot allow big banks to fail en masse and take the entire system down...but there should be some way to remove failing management and make them (and investors) pay the price.
March 11, 2008 6:42 PM | Reply | Permalink
"FREE MARKETS"? "FREE TRADE"?
LOL LOL LOL LOL LOL LO LOL LOL LOL LOL LOL LOL LOL
There is no frikkin FREE TRADE, there is no frikkin FREE MARKET!
There is only MANAGED TRADE and MANAGED MARKETS!
Free trade my ass!
March 12, 2008 10:58 AM | Reply | Permalink
I think we've found the free marketeers. In a column in today's Globe and Mail, Gwyn Morgan writes: "The market will work its way through this crisis, provided governments don't try to micromanage the inevitable pain." (http://www.reportonbusiness.com/servlet/story/RTGAM.20080331.wragendamorgan31/BNStory/robColumnsBlogs/home) . They're alive and well and living in cloud-cuckoo land.
March 31, 2008 11:53 AM | Reply | Permalink