But something went wrong on the road to privatopia. If everything is for sale, why shouldn't the guardians put themselves on the block as well? Now we find that the profit motive, unleashed to work its magic within the credit-rating agencies, apparently exposed them to pressure from debt issuers and led them to give high ratings to the mortgage-backed securities that eventually blew the economy to pieces.
And so it has gone with many other shibboleths of the free-market consensus in this tragic year.For example, it was only a short while ago that simply everyone knew deregulation to be the path to prosperity as well as the distilled essence of human freedom. Today, though, it seems this folly permitted a 100-year flood of fraud. Consider the Office of Thrift Supervision (OTS), the subject of a withering examination in the Washington Post last month. As part of what the Post called the "aggressively deregulatory stance" the OTS adopted toward the savings and loan industry in the years of George W. Bush, it slashed staff, rolled back enforcement, and came to regard the industry it was supposed to oversee as its "customers." Maybe it's only a coincidence that some of the biggest banks -- Washington Mutual and IndyMac -- ever to fail were regulated by that agency, but I doubt it.
Or consider the theory, once possible to proffer with a straight face, that lavishing princely bonuses and stock options on top management was a good idea since they drew executives' interests into happy alignment with those of the shareholders. Instead, CEOs were only too happy to gorge themselves and turn shareholders into bag holders. In the subprime mortgage industry, bankers handed out iffy loans like candy at a parade because such loans meant revenue and, hence, bonuses for executives in the here-and-now. The consequences would be borne down the line by the suckers who bought mortgage-backed securities. And, of course, by the shareholders.
Blaming free markets for the crisis is as simplistic as blaming deregulation, George Bush, Barney Frank, Fannie Mae, the Community Reinvestment Act, or any other of a number of villains that partisans on all sides have isolated and demonized for this crisis. This crisis didn't happen merely because the markets were too free. That is patently ridiculous. Beyond the scope of the unfettered greed that economic liberals like to look at, there was also a great deal of intervention in the free markets that perpetuated the problem. In fact, one could make the case that the pysczophrenic policy of the Federal Reserve over the last ten years has by far played the biggest role in setting up the crisis. All those bashing free markets seem to totally dismiss that the Federal Reserve has manipulated interests rates up and down no less than four times in nine years. Maybe just maybe, had the Federal Reserve not been so eager to interfere with the free market, then maybe just maybe, the free market wouldn't have responded so absurdly.
All those bashing free markets dismiss several other things as well. First, mortgages are one of the most hyper regulated industries we have. Every time a loan is closed no less than one hundred documents are signed. Those are signed in response to one regulation or another. Second, this crisis largely occurred in response to massive fraud on the part of borrowers, mortgage brokers, appraisers, and banks which all lied regarding income, assets, occupancy, and value. No market, free or otherwise, can withstand wholesale fraud. Finally, free market bashers dismiss the role of such regulations as FASB 157 in perpetuating this crisis.
Finally, what is the alternative? Should we have government control like in Cuba and Venezuela? Maybe we should have the quasi socialist systems of Europe where the economies have been largely stagnant for the better part of two decades. All those now clammoring for a plethora of new regulations to reign in this greed seem to dismiss the utter disaster of prior regulations like Sarbanes Oxley. Furthermore, those that demonize the free markets dismiss how the free market responded to this crisis. While pols all over the place debated what sort of new regulations we should have in mortgages, it was the free market itself that immediately eliminated all the trouble loans: stated, no money down, etc.
So, they can demonize the free market if they like. All it will really show is that they are partisan economic liberals with absolutely nothing more than a rudimentary understanding of how all of this came about. No one is saying that free markets are perfect. Some of us just realize that given any alternative, free markets are the best, and frankly, it isn't even close.