The Commoners Bailout Wall Street
by David Bollier
http://onthecommons.org (March 12 2008)
Has anyone noticed how the great apostles of the "free market" - the fierce enemies of "government intervention" in market activity - are engineering one of the great government bailouts of all time, with nary a nod of acknowledgement of the cognitive dissonance? I'm talking about the Federal Reserve's infusion of $200 billion in credit yesterday to Wall Street. In return, the Fed got a passel of mortgage-backed securities as collateral - securities whose value is so dubious that no one wants to buy them, even at discounted rates. Indeed, the collateral may end up being regarded as worthless.
So where are the hoots of derision at "government paternalism" and "reckless intervention in the free market"? Isn't it a mantra among this crowd - bankers, economists, investors - that markets are self-correcting and robust?
The truth, of course, is that markets only work well if there are sufficient oversight to curb their excesses, assure trust and maintain a functional stability.
Yet there have been so many years of lax oversight and unwise lending in financial markets - all the better to leverage bigger speculative returns - that the chickens are now coming home to roost. We taxpayers are being asked to clean up the mess, if only because the long-term repercussions could become much worse for everyone.
Attention has focused on Alan Greenspan, the former Fed Chairman, for his role in supporting Bush's 2001 tax cuts, encouraging subprime home lending and encouraging what has become a massive housing bubble. Greenspan, of course, is a famous disciple of Ayn Rand, author of The Fountainhead (1943), Atlas Shrugged (1957) and other libertarian fantasy novels about heroic individuals who triumph over misguided meddlers and "statists" (read "government" and "democracy") who would thwart their entrepreneurial genius. Greenspan has spouted this rhetoric on many occasions when it served to help the investor class. Yet as Harvard economist Benjamin M Friedman notes in a recent issue of The New York Review of Books, this aversion to government evaporates when this class of people faced unpleasant risks or downturns:
... Greenspan and his colleagues treated financial markets more as delicate flowers requiring careful attention and nursing. Similarly, although he frequently makes clear in what he writes that he rejects Keynesian economics, both at the Federal Reserve and during his time in the Ford White House, he consistently advocated a Keynesian stimulus (through tax rebates or lower tax rates) whenever he thought the economy needed a boost.
In short, for Greenspan, free markets are a "heads I win, tails you lose" scenario. Profits are privatized while debt and risk are conveniently socialized. Individual entrepreneurs get all the kudos for their risk-taking, but when things turn sour, that dreary, inept adult standby, government, is quietly enlisted to make things right.
Now that the heroic individuals of Wall Street have overreached once again - by making reckless and sometimes predatory loans as a means to higher and higher returns - we taxpayers are now being conscripted into the fight, at great expense, to stabilize financial markets.
USC professor Jon Taplin in his recent blog post, "The Fed is Freaked" {1} cites economist Nouriel Roubini's observation that the Fed's lending amounts to "a covert partial nationalization of the US banking system. Then the explicit partial nationalization of this financial system may only become the next step of this financial meltdown."
So why don't I see the great heroes of the free market stepping up to the plate to take a hit for the "moral hazards" they freely chose? Milton Friedman celebrated "freedom to choose" as the singular achievement of the American free market system, but as a taxpayer, no one has asked me whether I want to underwrite the moral and financial excesses of Wall Street in its hour of need. In fact, it's the Fed, a semi-secret decision-making body that caters to banks, that is engineering the latest bailout, not Congress, which at least has a modicum of accountability to all of us.
The truth is, I am a hostage to the financial system that the Fed and Wall Street sit astride. I have little choice but to prop up their free-market fantasies. A Fed bailout may be the best option available, however ineffectual at this point. Just don't insult me by saying I am "free to choose" even as my pocket gets picked to deal with the mistakes of "daring entrepeneurs". It would be refreshing if we could finally begin to have an intelligent, reality-based discussion about the interdependence of commons and markets, with appropriate safeguards for we denizens of the commons.
Link {1} http://jtaplin.wordpress.com/2008/03/11/the-fed-is-freaked/
http://onthecommons.org/node/1252
Bill Totten http://www.ashisuto.co.jp/english/index.html
http://onthecommons.org (March 12 2008)
Has anyone noticed how the great apostles of the "free market" - the fierce enemies of "government intervention" in market activity - are engineering one of the great government bailouts of all time, with nary a nod of acknowledgement of the cognitive dissonance? I'm talking about the Federal Reserve's infusion of $200 billion in credit yesterday to Wall Street. In return, the Fed got a passel of mortgage-backed securities as collateral - securities whose value is so dubious that no one wants to buy them, even at discounted rates. Indeed, the collateral may end up being regarded as worthless.
So where are the hoots of derision at "government paternalism" and "reckless intervention in the free market"? Isn't it a mantra among this crowd - bankers, economists, investors - that markets are self-correcting and robust?
The truth, of course, is that markets only work well if there are sufficient oversight to curb their excesses, assure trust and maintain a functional stability.
Yet there have been so many years of lax oversight and unwise lending in financial markets - all the better to leverage bigger speculative returns - that the chickens are now coming home to roost. We taxpayers are being asked to clean up the mess, if only because the long-term repercussions could become much worse for everyone.
Attention has focused on Alan Greenspan, the former Fed Chairman, for his role in supporting Bush's 2001 tax cuts, encouraging subprime home lending and encouraging what has become a massive housing bubble. Greenspan, of course, is a famous disciple of Ayn Rand, author of The Fountainhead (1943), Atlas Shrugged (1957) and other libertarian fantasy novels about heroic individuals who triumph over misguided meddlers and "statists" (read "government" and "democracy") who would thwart their entrepreneurial genius. Greenspan has spouted this rhetoric on many occasions when it served to help the investor class. Yet as Harvard economist Benjamin M Friedman notes in a recent issue of The New York Review of Books, this aversion to government evaporates when this class of people faced unpleasant risks or downturns:
... Greenspan and his colleagues treated financial markets more as delicate flowers requiring careful attention and nursing. Similarly, although he frequently makes clear in what he writes that he rejects Keynesian economics, both at the Federal Reserve and during his time in the Ford White House, he consistently advocated a Keynesian stimulus (through tax rebates or lower tax rates) whenever he thought the economy needed a boost.
In short, for Greenspan, free markets are a "heads I win, tails you lose" scenario. Profits are privatized while debt and risk are conveniently socialized. Individual entrepreneurs get all the kudos for their risk-taking, but when things turn sour, that dreary, inept adult standby, government, is quietly enlisted to make things right.
Now that the heroic individuals of Wall Street have overreached once again - by making reckless and sometimes predatory loans as a means to higher and higher returns - we taxpayers are now being conscripted into the fight, at great expense, to stabilize financial markets.
USC professor Jon Taplin in his recent blog post, "The Fed is Freaked" {1} cites economist Nouriel Roubini's observation that the Fed's lending amounts to "a covert partial nationalization of the US banking system. Then the explicit partial nationalization of this financial system may only become the next step of this financial meltdown."
So why don't I see the great heroes of the free market stepping up to the plate to take a hit for the "moral hazards" they freely chose? Milton Friedman celebrated "freedom to choose" as the singular achievement of the American free market system, but as a taxpayer, no one has asked me whether I want to underwrite the moral and financial excesses of Wall Street in its hour of need. In fact, it's the Fed, a semi-secret decision-making body that caters to banks, that is engineering the latest bailout, not Congress, which at least has a modicum of accountability to all of us.
The truth is, I am a hostage to the financial system that the Fed and Wall Street sit astride. I have little choice but to prop up their free-market fantasies. A Fed bailout may be the best option available, however ineffectual at this point. Just don't insult me by saying I am "free to choose" even as my pocket gets picked to deal with the mistakes of "daring entrepeneurs". It would be refreshing if we could finally begin to have an intelligent, reality-based discussion about the interdependence of commons and markets, with appropriate safeguards for we denizens of the commons.
Link {1} http://jtaplin.wordpress.com/2008/03/11/the-fed-is-freaked/
http://onthecommons.org/node/1252
Bill Totten http://www.ashisuto.co.jp/english/index.html
posted by Bill Totten at
11:41 AM
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