Many a blogger, pundit and journalist is running around right now and talking about the failure of the market, how more regulation is needed, and how the government has absolutely got to step in. Even noted “libertarian” bloggers are starting to sing this tune. There is only one problem, the current financial market is not a “free market”. It is a regulated market.
Now some might say, “Sure Steve, but it wasn’t entirely regulated, new financial instruments came into existence and they weren’t well regulated.” Fair enough. However let me toss a few flies into that nice soup.
1. These financial instruments are all that new.
These instruments have been around for quite sometime. The idea that there was a real estate bubble was also something that had been talked about for quite some time. Yet none of our regulator agencies did anything. None of the politicians did anything. They were all happy to let things roll along as they were. The economy is growing, people are spending money, things are good.
2. Setting oneself up for failure.
As some may know I own an American Pit Bull Terrier (APBT). This is a type of dog that comes with challenges many other dog owners can’t really comprehend. For example, the APBT is noted for being dog/animal aggressive yet human submissive. As such I can rarely go somewhere and take my dog off leash in case another dog or animal comes into the area and she goes after it. I have to constantly be on the watch for other dog owners who behave irresponsibly since other owners will walk around with their dogs off lease (this is both careless and illegal where I live due to cars and busy streets and a leash law). Basically I have to live by the motto of “Never setting your dog up to fail.” What does this have to do with the current financial market mess? I’ll tell you.
We have a government that regulates the banking industry, the securities industry, etc. We have the Federal Reserve whose job it is to ensure a sound banking industry. We have the Securities and Exchange Commission, the FDIC, the Treasury Department, and probably a few Congressional sub-committees I don’t know about as well. Their job is supposedly to make sure stuff like our current crisis doesn’t materialize. Yet here we are. What happened? We set ourselves up for failure.
First a fasle sense of security. With all these regulatory agencies many people feel they can shirk their responsibility to learn about what they are investing in. Why bother, the government is making sure things are on the up-and-up.
Then there is the periodic bailouts. I remember Chrysler being bailed out. Then there was the savings and loan industry collapse. Then after 9/11 the government bailed out airlines. These periodic bailouts send a signal: screw up big enough and Uncle Sugar is going to ride to the rescue. The subtext is: if you are going to screw up…do it really big.
So here we are…again. A big screw up, or a sequence of really big screw ups, and another crisis and lots of money going into yet another bailout. And everyone will talk like this will be the last one, but it wont. This bailout is going to contain the seeds for the next bailout. Why? Because the consequences of big screw ups are minimized. Minimize the costs of something and you get more of that something.
And there is one last point about this whole mess. Regulation of the economy bears striking resemblance to an arms race. First you have a crisis, so the government intervenes and regulates whatever caused the crisis. Now people out there in the economy look for a new way of making that kind of money, so they come up with something new. Eventually these new methods of making money percipitate a new crisis. The government intervenes and regulates this new thing. And on and on it goes.
So to claim that this is a failure of the market is overly simplistic. The reality is that what we have is a failure of the regulatory agencies and the government to deal with a correction to the market. In short, due to government incompetence and lack of foresight the very agencies that were to deal with these kinds of problems, and indeed, prevent them didn’t. They failed. Nobody who advocates for a “free” market thinks that the market is always going to produce superior results. Back in the early 1900s and late 1800s the view was that recessions were part of the business cycle. A way of clearing out the rot and deadwood, as well as correcting people’s false perceptions. That was deemed unacceptable so regulatory agencies were put in place. Yet here we are again with another crisis and another bailout. I submit that this is a failure of the regulatory apparatus. A failure to adapt. A failure to be forward looking. A failure to do its job.
