Oct
2
The freak market
Filed Under Sunrise on KGMB9
Everyone’s talking about the free market, the amazing self-adjusting engine in which supply and demand sorts everything out in the end, provided you don’t fiddle with it. And it’s not true.
The free market works well most of the time, and, important, it almost always regulates itself better than humans can when they interfere.
It is an obvious fallacy that something working MOST of the time does not guarantee it will work if left alone THIS time. (It would also be a fallacy to argue that interference will work in a situation because the situation itself seems exceptional. I’m sure there are exceptional circumstances for which the best solution is still to let the market fix itself.)
A less obvious and more important fallacy is the assumption that taking regulators out of the equation takes humans out of the equation. There are still many other humans in a “free market” and some of them can also mess it up. In fact, the best thing regulators do, when they do their jobs, is to counteract the meddling of these other humans, including con artists, embezzlers, spin control professionals, unscrupulous accountants, incompetents who are considered experts, politicians wooing or appeasing special interests or the broad electorate, and others who interfere with free markets forces way more than regulators do.
In recent times a new theory has emerged about the Great Depression, that what really made it so bad, as opposed to something more shallow and shorter-lived, is that when banks failed, their loan officers dispersed to the four winds. People who used to borrow from loan officers who knew their reputation were instead approaching strangers who had no idea if they were good for their debts. Theories and concepts never catch on until they acquire technical names, and the technical name for this phenomenon is “loss of intellectual capital.”
The punchline is that the young economist of the 1980s who came up with this intriguing hypothesis was a fellow named Ben Bernanke.
In this instance, the problem with the “free market” was that loan officers suddenly didn’t know what they were doing, as an unintended consequence of folding all those little community banks.
The current crisis, to the extent that it stems from aggressive selling of risky subprime mortgage-based securities as if they were not that risky at all, can also be blamed on incompetents working as experts.
Investors, including professional money managers who also should have known better, threw caution to the winds in search of higher returns, then freaked out when mortgage default soared and stopped buying mortgage-backed securities altogether.
The freak market choked off credit because lenders, these days, resell loans as soon as they make them, then lend the money out again, and if they can’t unload bundles of loans they already made, they can’t continue the process. The freak market has arrived.
I think a future Ben Bernanke will pin the blame for the current crisis on lax regulatory oversight, not just by the Republicans in power now but by the Democrats in power before them. This is my con man theory.
“You can build a better mousetrap, but the mice get smarter,” Walter Matthau said while playing an unscrupulous attorney in “The Fortune Cookie.” Society is about progress and innovation, but unfortunately this applies to evil as well as good, and con artists are always inventing new ways to scam the system and do an end run around the free market.
I define con artist very, very broadly, including many fine citizens who have nonetheless devised ways to game the financial system. This includes all those people stepping in as buyers and sellers of oil contracts who have inserted themselves into the middle of the supply chain for a quick profit. It includes all those people who aggressively sold mortgages to people who stood a good chance of not being able to keep up with the payments, figuring they would take their commission and leave someone else to clean up the mess if there was a mess. It includes well-dressed Wall Street brokers who did the same thing at the varsity level, marketing mortgage-backed securities to institutional investors, figuring if the bottom of the market fell out it wouldn’t be their problem. Like all the finest con artists, they’ll tell you very convincingly that they did nothing wrong, even that it’s part of the free market.
To some extent that’s even true. This free market would eventually correct itself. The problem is that it would correct itself by creating a global depression. Probably just a recession in America. We have so many nice controls in place. Many countries don’t, and it is a global market now. When you hear people say it’s wrong, even insulting, to compare what might happen now to the Great Depression, in a way they’re right, but if you look at the whole world, they’re probably wrong — we’d suffer a little, but not too much — the Dust Bowl would be on other continents.
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