Maybe We’ll Get a Free Market Out of the Deal!

Compare.

Exhibit A: “…Third, institutions that are too big to fail have turned to be too big to manage. It is vital to get Freddy Mac, Fannie Mae and AIG away from the Washington politicians, lobbyists and bureaucrats. A method of orderly receivership and sound return to market disciplines is essential. A policy of capitalism for the successful and socialism for the failures is unsustainable. A policy of welfare for the Wall Street rich will sicken the entire political system and cripple the economy. Fannie Mae and Freddie Mac clearly should be broken up into smaller companies because they are clearly far too big to manage and far too dangerous and over time they should be weaned from their government endorsements and they should cease to be government sponsored enterprises with future loans made only with market security.

Fourth, the institutions in receivership should be barred from hiring lobbyists or encouraging political contributions. It is intolerable to have those who are soaking the taxpayers use the taxpayers own money to manipulate the system to get even more money out of the taxpayers. .

Fifth, we should insist on new transparency for financial systems so people in the future will know when cunning and clever people are manipulating reality in the pursuit of ill-gotten wealth.”

Exhibit B: “The plan also calls for: participating firms to disclose the value of the mortgage assets on their books, ending Fannie Mae and Freddie Mac’s securitization of “unsound mortgages,” reviewing the performance of the credit rating agencies and having the Securities and Exchange Commission audit failed companies to ensure their financial standing was accurately portrayed.” Look familiar?

Exhibit B is CNN’s description of the Republican plan to get the economy back on the right track, announced this evening. Exhibit A is from Newt Gingrich’s 18-point plan to solve the financial crisis, which was written… last Sunday. Hmm. Regardless of your feelings on the fiscal crisis, it looks like the old Georgian is pulling quite a few strings lately. After all, he coined a nifty little campaign theme a few months ago. In its latest incarnation, it became the catchy “Drill, baby, drill!” Anyone else seeing him on a McCain Cabinet come next year?

As for the crisis itself, it is high time to let Wall Street go ahead and lose some weight. Many talking heads have been quick to point to corporate irresponsibility and a lack of transparency as major reasons for the financial market meltdown. I am inclined to agree, but these critiques do not get to the real meat of the problem, nor do they offer any reasonable free market policies for reform. Indeed, the greatest problem is one that can be solved by looking back at the government: inflation.

What is it that ultimately made Wall Street lose its mind and make these bullsh loans in the first place? Inflation. The presence of hundreds of billions of dollars in the markets over the years that should not exist hurts. It does not hurt unconditionally, though. For a while, perhaps three or five years, it produces lower-than-expected unemployment and the economy grows. Combine that with some fortunate mishaps in East Asian markets and a rapid expansion of free trade and you have the Clinton years. Now, though, the chickens are coming home to roost.

All that money that the Fed pumped into the economy to “lower interest rates” certainly did lower interest rates: it lowered them so much that anyone and everyone could get loans and mortgages. Poor credit? No credit? Big problem!

Now, we are suffering the consequences. Giving capitalists hundreds of billions of dollars to play with and then failing to demand any semblance of transparency in transactions was like shipping tons of crystal meth to middle-class white teenagers and mandating that they draw their bedroom shades. Oops.

The proposed solutions are as ridiculously stupid as current federal fiscal policy, without even attempting to break the power of vain politicians looking for a poll boost. Treasury Secretary Henry Paulson, former CEO of Goldman Sachs, has proposed a $700 billion buyout of bad mortgages. Basically, since these mortgages were so deadly they killed Wall Street, Paulson and President Bush think it’s high time that the American taxpayers start bearing the burden. Why suck poison out of a wound when you can just drink it down? And drink it down we will if a buyout goes through. As economist Yves Smith reminds us, “(the proposed buyout) gives the Treasury imperial power with respect to a simply huge amount of funds. $700 billion is comparable to the hard cost of the Iraq war, bigger than the annual Pentagon budget. And mind you, $700 billion is not the maximum that the Treasury may spend, it’s the ceiling on the outstandings at any one time. It’s a balance sheet number, not an expenditure limit.” This is not to mention that $700 billion more may well be enough to save the very businesses that need to die most, all at the expense of the American taxpayer. Bush and Paulson are capitalists, all right. Too bad they oppose free markets.

Fortunately, not all Republicans and economists have whored out to the mighty pimp of corporate socialism. Senator Richard Shelby of Alabama, ranking minority member on the Senate Finance Committee, appears to have worked behind the scenes with grassroots activists and possibly even Newt Gingrich himself to engineer the failure of the buyout bill this afternoon in the annals of the White House. Popular opinion seems mobilized against the proposals, with even liberal-leaning sites like CNN showing majorities against the plan in online straw polls.reason Magazine, a mainstay of libertarian thought, ran an article online tonight at http://www.reason.com/news/show/129041.html featuring the perspectives of high-powered and well-credentialed economists, including the above-quoted Yves Smith, who are devoted to the free market, even in the face of corporate power. These guys get it: Fannie Mae and Freddie Mac are mercantile messes created by the government, big business baddies are about to milk the federal budget for all it’s worth, transparency and non-intervention are the kind of spooky adherence to principles we need most right now, and (gasp!) a return to the gold standard seems to be the only reasonable way to save the economy from the politicians and restore some sanity to finance markets.

Before we think about making voters comfortable and looking like we are doing something, and before we elect another corporatist president ready to sign a pact with the devils of Wall Street, and before we throw up our arms and all vote Socialist, let’s give the free market a real shot at it. Rather than letting shocks and fears scare us into giving the government massive new powers, like we did after 9/11 and in the wake of the Great Depression, let’s try a little sanity and principle.

After all, free markets have always been a lovely, all-American alternative to capitalism. And that may be the best offer that Wall Street giants and the Fed have ever unwittingly given the American people.

CNN article: http://money.cnn.com/2008/09/25/news/economy/deal_reached/index.htm?postversion=2008092513
Gingrich’s plan: http://solutionsday2008.com/blog/2008/09/get-the-politicians-out-of-the-economy-recipe-for-sound-economic-growth.html
reason Magazine article with free market economist quotes: http://www.reason.com/news/show/129041.html