Jul

5

 The biggest political story today is the global ascendancy of state economic power and the fading of the free market as the world's big economic idea. Even here in New York City, former center of the financial universe, the subprime mess has supposedly discredited the philosophy that less regulation is better. This is all rot; the anti-free market trend will mainly serve, as it always has, to help ambitious would-be power-wielders to reach their career goals. Lack of regulation didn't do the financial system in. Plenty of blame has to go to the regulators themselves. A series of power grabs and subsequent attempts to control unintended consequences led to even more unintended consequences, until the threads were too tangled to follow.

Begin, for the sake of beginning somewhere, with Greenspan's attempts to be a hero for all seasons by turning the spigot off and on, again and again, and proceed to the subsequent heavyhanded attempts to eliminate all risk from pension fund portfolios after the Nasdaq crash and earnings fraud at Enron/WorldCom. Pension funds couldn't invest in stocks the way they had been doing — too risky! What could they do to meet their payout obligations? Wall Street had a wonderful new invention –top-rated mortgage and asset-backed securities. Unfortunately, they weren't exactly risk-free. Was lack of regulation the problem? No. And neither was the desire to get rich. The problem is that the bright minds of Wall Street can come up with contorted solutions when they have to satisfy their customers while dealing with regulations designed to eliminate risk. Unfortunately the whole debacle may become the excuse for a massive power shift to the federal government. Larry Summers had a piece in the FT last week calling for the government to save the economy with infrastructure spending. Sure, let's get the Army Corps of Engineers back to work redesigning natural waterways so they never work properly again. Back in the '80s, Reagan was attacked for his supposed simplemindedness, but in the '90s, his basic ideas had become the consensus. So much that as VP, Al Gore's main hobbyhorse was cost-cutting. Nowadays, it's hip in Manhattan to trash the free market. Our leadership abdication comes at a bad time, because the money nowadays is in the hands of people who care nothing for economic freedom. Nobody is aspiring to avoid the Road to Serfdom. China's free market is largely an illusion; prices for commodities are set by the government, not the market, the currency is still not freely convertible, the government still has a tight grip on far too much. The aspiring Mideast financial centers are being thrown up with royal-family money and control. Russia–
let's not even go there; the replacement of democratic aspirations with a systemic corruption is too sad to contemplate. Fortunately nobody can block people who want to be free forever. But there is no political freedom without economic freedom. Those pseudo-Socialist Realist posters of Obama that look like Che give me the shivers.

I am indebted to the brilliant Louis-Vincent Gave for some of the ideas set forth here, but any errors, misunderstandings or misapplications are mine alone.

Stefan Jovanovich replies:

Laurel should take heart. My niece, who hopes to join the regulatory clerisy by becoming a member of the California Bar, has just publicly declared Obama the savior. She has been infallibly wrong about American politics for almost two decades now, and the more emphatic she is (Bilbray doesn't stand a chance was her last vocal pronouncement) the more reason there is to take the other side of the trade. Money chases freedom; that is why it has been flowing west in this country for nearly two centuries. What has changed in California in the past two decades is that the desire for economic regulation has overcome the "Don't Tread on Me" spirit that allowed us to be the world's greatest collection of fruits and nuts. But, that is also changing. The Democratic candidates lining up to replace the Governator (who is term limited out in 2010) make lots of noises about how terrible things are, but they are careful to limit their tax-raising rhetoric to "closing loopholes". None has said a word about tax rate increases. Gavin Newsome, San Francisco's mayor, revived gay marriage as an issue after the California Supreme Court rewrote our State's constitution because it is a safe issue for the Democratic primary and not one that arouses any great passion among Independent voters. It also avoids the question of where the bureaucracy is going to get the money. The voters have already made it clear that the answer will not be from new taxes, even on the rich. The Sons and Daughters of Liberty are still alive and kicking and asking for lower tax assessments on their real estate.

George $oros wrote:

Because financial markets do not tend towards equilibrium they cannot be left to their own devices. Periodic crises bring forth regulatory reforms.  That is how central banking and the regulation of financial markets have evolved. […T]he reflexive interplay between financial markets and the financial authorities is an ongoing process. The important thing to realize is that both market participants and financial authorities act on the basis of imperfect understanding; that is what makes the interaction between them reflexive. […]

[Some people] blame market failures on the fallibility of the regulators and they are half right: both markets and regulators are fallible. […] The fact that regulators are fallible does not prove that markets are perfect.  It merely justifies reexamining and improving the market environment.


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