Tue, Sep 9, 2008 | Jared Woodard
“If anybody thought we had a pure free market system, they should think again.”
A number of readers have asked us for our take on the Freddie Mac/Fannie Mae bailout, so here it is. In the financial blogosphere, reactions to events are immediate, if often half-baked; in academia, reactions are thoughtful but take months or even years. We figured that waiting two days is a barely acceptable compromise. We have two reactions to note.
Traders: Sit on Hands
From a trader’s perspective, the ethics and economics of the thing are and must be irrelevant; the only task is to react. There’s not much to say on this front, because we simply aren’t sure how to react, as the market response to this event is leaving many of us legitimately puzzled and uncertain. As we’ve said before, cash is a position.
The Failure of Neoliberal Economics
But from a human perspective, this is a disaster for almost everyone concerned. It amounts to a situation in which, as a society, we have ensured that profits will be privatized and risks will be socialized. This state of affairs is simply impossible in any free market system. Dean Bruner’s remark above doesn’t actually go far enough – America has never had a pure free market. And this bailout confirms what everyone but the Kudlows and Forbeses and Norquists of the world has suspected for ages: ours is barely a free market at all. In fact, the real question is, for whom is this market free? If you’re poor or underemployed or sick or unfortunate, you are extremely free – free to fail. If you’re wealthy and politically connected, on the other hand, you are free in a very different way: you are free to profit from whatever endeavor you attempt, but you are completely unfree when it comes to risk or failure or foreclosure.
The Fed and the Treasury function as an American Comintern. Their purpose is clearly the overthrow and dissolution of the system whereby investors and institutions would be allowed to suffer the consequences of their actions. If processes of creative destruction are a primary engine of growth in a capitalist economy, our financial bureaucracy has set itself the task of undermining capitalism in favor of a new system of socialism for the rich.
This goes back much further than the current news cycle. It is bigger than mortgage lenders or even electoral politics. The blame rests primarily not with Bernanke or Paulson, but with the Republican Congress, Democratic President, and Libertarian Fed governor who made all this possible in the late 1990s via deregulation and low interest rates. The official justification for the bailouts of Freddie, Fannie, and Bear Stearns – that they were necessary to avoid a more protracted and more painful financial collapse – might be true. But that we could ever be in need of these bailouts in the first place only demonstrates that the central thesis of neoliberalism itself is false: deregulation simply has not allowed individuals and institutions to manage risk more effectively. On the contrary, thoughtless laissez-faire-ism has only provided incentives for banks and borrowers to disregard risk management altogether.
“American Comintern” and “socialism for the rich” are not tongue-in-cheek rhetorical devices. For Bernanke and Paulson to pretend that the current crisis is some bewildering exception to the rule, rather than a natural consequence of irrational regulatory policy is act of obfuscation worthy of any issue of Pravda under Krushchev. Any consistent partisan of raw and unrestrained capitalism would decry these government interventions with every breath; strangely, those same partisans have had the opposite reaction.
For a contrasting view to what we’ve espoused above, cf. CNBC all day long and the Wall Street Journal editorial pages.
For more on this view, we recommend:
- John Quiggin’s work on the risk society, which he relates to current events in a post at Crooked Timber.
- The Post-Autistic Economics Network, and especially their journal.
- Greg Feirman is extremely cogent. Studying philosophy will do that to you.
- Jonathan Freedland on turbo-capitalism from a British perspective.
- Barry Ritholtz is always worth reading, and has been quite good on recent events.