Dave Yost: The perils of a free market economy
The current debate about what to do about our national debt is indeed a welcome change. However, while there is little argument that our recent deficit growth is unsustainable, there is also no agreement on how to fix the problem. At the center of this discussion is the question of what role the government should have in our lives.
On the far left are the serious progressives like those who wanted Congress to pass a single-payer health care bill. They want Social Security secured forever and expect Uncle Sam to take care of us all.
On the right, we have the Tea Party and extreme conservative Republicans who argue that the federal government has no business getting involved with anything they perceive as the private realm. Some of these people are so aligned with the Libertarian view of life that I wonder if the GOP may self-destruct and resurface under the banner of a new Libertarian hero. The likes of Rupert Murdoch, the owner of Fox News, would love to see public education disappear, and he is doing his best to fire up the anti-big-government crowd to support this mindset.
It is safe to say that this right-wing crowd supports what is called the “free market” model of the economy. This view, promoted by the likes of the late Milton Friedman, suggests government should sit back and let things run as they may. Friedman, the 1976 Nobel Prize winner, was the brains behind the deregulatory movement. To a Free Market believer, business is made up of people of good intentions who can be trusted to mind their stores and do as good a job as they can while producing products and providing services that we need. It is a nice, cozy view of things and one that many honest people of the conservative slant have always supported. Ronald Reagan talked the nice guy, free market talk, and we loved him for it. Conservatives were convinced that we should take care of people who really needed help but stay the hell out of the way of private enterprise.
The opposite side of this Free Market view is that the federal government has to be a watchdog and chief regulator because we will always have private parties solely concerned about their own welfare. Without laws to stop them, they will do as they please and can cause considerable damage. Joe Stiglitz, the 2001 Nobel Prize winner, is one of the major proponents of this view today. He argues that without strong government regulation, we are at the mercy of those who can really upset the apple cart.
I know of no better case to demonstrate Stiglitz’s argument than the financial meltdown in 2007/2008. As Alex Miller recently described in his recent SDN column on the subject, the recent Financial Crisis Inquiry Commission (FCIC) report concluded that many firms and agencies were negligent at best as they accepted enormous risks and failed to keep the ship afloat. Any doubters at this point should consider the case of AIG, which we eventually bailed out to the tune of about $180 Billion.
By late 2008, AIG held $1trillion of insurance contracts on 12 major financial firms that were payable to various parties if any of these firms were to default. Some of these contracts were taken out by hedge funds, Wall Street competitors and even foreign banks at a time when the insured firms were known to be on the brink of collapse. This is like buying fire policies on homes in the path of a raging forest fire and having the claims paid to literally anyone who could pay the insanely high premiums.
While the general public was shocked by the manner of which the big financial firms and hedge funds took us for a ride, many surprisingly supported GOP candidates in last fall’s election. Nearly all of the Republicans voted against the Wall Street Reform bill earlier in 2010. Even though many of them screamed about the TARP bailout in 2008, they still held tight when Wall Street lobbyists told them they better not pass the reform bill. Even Russ Feingold, my former Wisconsin senator who voted against the bill because it did not go far enough lost his seat to a new guy riding the “No Big Government” horse.
I was not surprised that all of the Republican members of the FCIC commission failed to support the Democratic majority view that this disaster was preventable. Had they supported this view, it would be an admission that a regulatory body should have done their job and in fact regulations should have existed and laws remained intact that would have prevented this meltdown in the first place.
A key danger going into the next presidential election cycle is that the public continues to be blinded by this notion that our problems will go away if we get government out of the picture. Should we eliminate the EPA and continue to allow firms to be “too big to fail” the polluters and gamblers on Wall Street will have free reign. Certain potential presidential candidates who have no clue what financial derivatives did to us are still blindly opposed to the necessary government actions that have at least stabilized things and can go a long way towards minimizing future damage. If these groups get rid of a few more Democratic senators and put a patsy in the White House, they would have made their day.
Portions of this article are based on Andrew Ross Sorkin’s recent book “Too Big To Fail; an excellent review of what actually happened in 2008.
Dave Yost is a retired Bell Labs engineer, now living in Wisconsin and Silverthorne.
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