The Free Market?

Beware…

The concept of an inherently perfect and stable financial market has been the leading ideology among economists for decades. This romanticized view of a magical self-policing market is pervasive. The Efficient Market Hypothesis and Adam Smith’s “Invisible Hand” concept promote the idea that stocks are priced perfectly and the market will best regulate itself. However, with the recent financial crisis, economists have been forced to reassess their views. Why did this perfect market crumble?The stability of the market is of paramount importance to America. The recent market devastation has led to the obliteration of retirement funds, increased foreclosures, and high unemployment. America’s global security depends on a powerful economy. A financial crisis of this magnitude cannot be allowed to occur again. This fall was in part due to inadequate regulation and blind faith in quantitative mathematical derivatives. The invisible hand that was supposed to guide the market became a sleight of hand that engaged in deceptive practices. Lack of proper financial regulation is an issue that must be addressed.

The view of a perfect market is backed with impressive looking mathematical equations. One of these equations is known as Value at Risk (VaR). This equation is used to measure risk and is viewed as a nearly perfect formula. However, this formula did not predict the Asian financial Crisis of 1997 or the Russian default on debt of 1998. Long-Term Capital Management crumbled and lost over 4 billion dollars during the Russian default due to faith in complex math. Mathematics should not be treated as absolute truth. This same math was used to rationalize corrupt practices that led to the American financial crisis.

Years of market deregulation by the government created an environment ripe for risk fraught capital ventures and unethical games. The repeal of the Glass-Steagall Act in 1999 removed the separation between investment and commercial banks. Investment banks used their depositors’ money from commercial banks to partake in risky trading. Investment banks had improper leverage. The actions of investment banks such as Bear Sterns and Lehman Brothers directly led to the financial crisis.

Recent regulatory provisions such as the Dodd-Frank Act and Sarbanes-Oxley Act are not perfect but begin to address fundamental problems present in a deregulated market. The selfish actions of a few elite bankers should not be allowed to completely wreck the lives of millions of hard working Americans. Economic busts permeate into the well-being of every industry and demographic. The elderly cannot afford the cost of living. Students cannot afford the high tuition costs required to attend a university. The success of the economy directly relates to the success of every individual. The solution to this problem is to pass proper regulation. Politicians need to look past self-interest and hyper-partisanship to properly protect the American public.

The economic damage caused by a market unfettered by proper regulation has been staggering. This is not to say that the government should become an all-powerful puppet master. There must be a proper balance between free market capitalism and appropriate regulation. Predatory lending and unethical practices should be monitored and corrected. The assumption that the market will run smoothly on its own is oversimplified.

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8 comments on “The Free Market?

  1. twissblog says:

    As someone who works in finance, I can only point out that most people (usually on the right) who idealize “the free market” are those who have never gotten particularly close to it. Assuming finance needs no regulation is as crazy as assuming that roads need no regulation.

    • williamsry92 says:

      Thanks for the comment! I really appreciate the input, especially coming from a finance professional. Do you have any advice for a student considering working in the industry?

      • twissblog says:

        If you’re genuinely interested, focus on the asset-management/trading side, and stay away from the investment-banking side, which has huge overcapacity…also, don’t do it just because you don’t know what to do and you’ve heard it pays well–that’s a surefire path to mediocrity

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  3. The only economic model that has proved to show a “serf” class that can and will rise out of poverty is supply side economics.

    As Friedman once stated (and I paraphrase); “Please show me an economic model that gives the poor a chance to rise out of poverty that is better than that of capitalism? Morality, ethics and virtue? Even I do not trust you enough (Mr. Donahue) to tell me what is virtue!”

    Mr. Donahue being the socialist of course.

    I’m sorry, as I butchered Friedman, however… does the Keynesian model prove that the poor are better off according to progressives?

    Never has and never will.

    Disturbing to me is how close we are to believing Keynesian economic nonsense… God’s Freewill will has been corrupted.

    Short term stimulus provides nothing except prolonging inevitable disaster based on Marxist / socialist models.

    The real problem…

    The socialist knows exactly what their spending does to create chaos

    While…

    The capitalist is to busy working to look behind him to see the locust eating away at his or her soul (production).

    I’m digressing here but I will state this again:

    The locust is Marxism. Marx is pure hate, distrust, envy and evil. Study it well as pure hell is here… however, there is still hope.

    • williamsry92 says:

      Thanks for the comment. I always enjoy a good economic discussion. I somewhat agree with your thoughts on Marx, albeit not as extreme. I agree that capitalism is a far superior market system to Marxism. However, to characterize Marx with “pure hate, distrust, and evil” is too harsh. Marx was a revolutionary intellectual who provided theories like the Labor Theory of Money to economics. His theories are interesting to study. Capitalism is the best market system for a society, we agree on this point.

      However, when you state that “supply side economics” is the best form of capitalism, I must disagree. Legislative deregulation has caused nothing but problems for the US financial system. According to the Congressional Research Service, “Laws such as the Gramm-Leach-Bliley Act (GLBA) and the Commodity Futures Modernization Act (CFMA) permitted financial institutions to engage in unregulated risky transactions on a vast scale. The laws were driven by an excessive faith in the robustness of market discipline, or self-regulation.” Many other acts allowing the “Invisible Hand” to guide the market were passed prior to the Financial Crisis of 2007. The effects of supply side economics sound good in theory, but fail in reality. The frailty of the human condition violates the central aspect of a completely free market ideology, people make rational choices. As a previous commentator said, “Assuming finance needs no regulation is as crazy as assuming that roads need no regulation.”

      If you want to abolish Government, your life will become a lot harder. Think of all the positive programs the Government enables: federal student aid, Medicare, Medicaid, housing grants, and road maintenance. You want to leave these to the free market? Capitalism fails catastrophically on the large scale. “Running schools, armies, hospitals, prisons and emergency services “for profit” is a huge mistake. We have all of the above in the US, and are encouraging more, not less, which is why we have sub-par education, too many wars, bad health care, high criminal recidivism, and high crime.”

      I find it ironic when most Americans complain about the US condition, they say they will move to Canada or England. These countries are prospering BECAUSE they have a strong government and socialized programs.

      I look forward to your response. Thankfully, we can have a civilized discussion without yelling and screaming unlike some I have spoken with! I always enjoy listening to different points of view.

      Ryan

  4. Ryan,

    Nice read. I have a few points…

    1.

    “Legislative deregulation has caused nothing but problems for the US financial system.”

    So you would like more regulation to stifle creativity that emboldens the worker to go to market with a product?

    Again, as I previously stated, nothing is perfect. Private markets will correct while a socialist, Government run economy can only throw money at a failed system.

    Look at the Soviet Union.

    2.

    Marx is evil. He was not an economist but rather a simple revolutionary. Please get in his odds are and understand his thought process… “I want to be king.”

    The working class and labor do not coincide. What you and many progressives state is a historical narrative that equivocates labor = working class.

    Not the case.

    The working class in a free, supply side economy produces and creates.

    Do you agree so far?

    A Marxist /Socialist/ Keynesian environment promotes that the working class “not” create… but rather promotes big government or a tyrant subsidize and create.

    It (Marxist Socialism) historically causes more war and death that any other principle… NOT economic principle, as it is revolutionary thought and not economics.

    Marxism erodes the soul of the true “laborer”. How? A “true” laborer labors and identifies a better way to make a product. or he or she identifies a better way to logistically support a new product. The laborer creates, he does not fulfill product.

    I can make the argument that Marx wants to simply have the laborer fulfill product to benefit the state… as he would!

    Get it yet?

    The capitalist / free market system promotes the “laborer” to go out on his or her own and find a better way without any government!

    Marxism erodes the soul of the true “working man” as the “union” is what Marx thought was the true worker paradise.

    Unions are evil, socialism is pure evil and Stalin, Mao, Hitler and Pol Pot exemplify the waste of human life searching for socialist ideals that will never come to fruition.

    The human soul creates and prospers without government.

    Let’s talk more friend.

    God Bless.

  5. Real quick… our Founding Fathers understood the need for government. I also understand the need for governement.

    Overreach by governments will always create war and must be prevented at all costs.

    George Washington could have been King of America… he believed in a higher being and a Republic.

    You, Ryan, can speak to me without worries of a King getting upset that you disagree with his or her agenda.

    I really want to make sure, for my children’s sake, that OUR Kids can have discussions like this in 20 years.

    Peace Bro.

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