September 10, 2008

The Unregulated "Free Market" is Dead

It is now officially acceptable to laugh at anyone who promotes unregulated "free markets." Free markets are promoted by three groups of people: Criminals who are willing to use exploitation to amass wealth, ideologues who operate on deeply held belief systems and are thus blind, or those who lack enough knowledge to understand how the world works.

Unregulated markets allow people to do anything to make money, including changing laws to legalize criminality. Consider the current example of the mortgage brokers who made home sales over the past decade without checking credit. With each house they sold they got fees and had no risk if the mortgages they sold failed. The higher the house price, the bigger the fee. Not all mortgage brokers were exploitative, but the system in which they worked became increasingly corrupt. First line "banks" that underwrite the mortgages were quick to unload the mortgages to avoid risk.

Secondary "financial institutions" that amass mortgages and either sell them in bulk or turn them into bonds to be sold passed on the risk and took their huge profits.

Brokerages that buy and sell such bonds made money on every transaction, never holding any risky mortgages. All the while they told investors the bonds were secure, because the "the real estate is collateral" and the bond rating companies say they're good. Never mind the obvious fact that the real estate was way over valued. This is not a debatable point; not a quibbling point. Few people on earth have not heard, or said themselves that, "If I had to buy my house today, I couldn't afford it"? That's the main street definition of over-valued real estate.

As noted, the bond rating companies are paid handsomely to say the bonds are high grade. Their employees are part of the Wall Street class; gotta be paid a lot to live in Manhattan.

The law firms and lobbyists make sure it is all technically legal by getting corrupt or ideological or stupid elected officials to make it so. Lobbyists got very wealthy carrying the messages between Wall Street and Washington (another no-risk middleman benefiting from the "free market"). Ain't the unregulated free market great for these folks? They've got to love it.

Communications firms, like the ones who produce magazines that touted Enron in the early 1990s, write glitzy stories about maverick businessmen who created "innovative risk diversification systems." These "innovative risk diversification systems" were just fancy ways to "pass the buck" on to pension funds and other investors. The unregulated "free market" seemed so legitimate despite some of us knowing it was a huge scam.

A similar analysis of other industries reveals the same pattern of corruption through all sub-sectors as described above; they all have their lawyers, their accountants, their marketing arms; we saw it in the energy "market" with Enron. That market, by the way, is still totally corrupt. The financial industry, with unregulated hedge funds, is the same. Energy, Real estate, financial, all central to what we call our "economy" and all totally corrupt.

We are now all collective deers staring into the headlights of reality. Obama and McCain will both try to paper over this fundamental failure of "the system". They will do this by bailing out the "free market" and passing the cost to future generations of tax payers; the crisis will magically end, a huge debt will be passed on to future generations, and the corrupt system will continue.

It's an old story, seen as recently as the 1980s Savings and Loan Scandal, even more recently if you count Enron (cost California energy rate payers alone at least $10 Billion). It will change when Americans get very angry with the realization that a small number of people get really really rich off of these "free market" scams. Then, perhaps with very little control, these angry people will do what ever is necessary, using any means available, to put a stop to the corrupt unregulated "free market".

The alternative would be to make real change, far beyond what either major political party is contemplating. That's unlikely because the system is so deeply corrupt it has become a danger to itself and those very few people who benefit from it.

An unregulated "free market" is corrupt by definition, because if there are no rule (regulations) the law of the jungle prevails. Unregulated commerce will inevitably pass debt onto future generations. This is a massive form of exploitation by a minority of the commerce class. Is the majority of our civilization really so easily duped?


1 comment:

Anonymous said...

After trying to use your logic to explain a plane flying through the air I had to conclude that gravity is dead.

I'm not sure if I should treat you like a small child who needs to be educated, as a parasite who wants to feed off the productivity of others, or as a power hungry, legitimately "bad" person who wants to control others. The failed markets that you cite as examples of free market failure are actually highly regulated and it was the regulation that led to or amplified the failures. In a truly free market banks that failed would not be bailed out, mortgage brokers who sold bad mortgages would be sued if they broke their contracts or would be out of work if they were just sneaky (i.e., there would be a personal consequence). Markets correct inefficiencies (including corruption) amazingly well and they correct them more quickly when they aren't centrally managed by collectivists who think that they know better how to run our lives. How on earth can you explain the massive failure of socialism worldwide and the massive success of freedom without acknowledging the value of truly free markets.