Robert Kuttner knows nothing about the Free Market
Robert Kuttner displayed his economic illiteracy in spades this week, in an opinion piece published by the Boston Globe. His failure to recognize the role that the federal reserve plays in the market underscores a complete and utter incomprehension of Free Market thought. He writes:
Paulson's plan would intensify the hands-off philosophy that invited the credit crunch. He would make the Federal Reserve a superagency to monitor large financial firms and provide emergency bailouts. He would reshuffle some federal agencies - but actual regulation would be weakened. The plan proposes, "The Federal Reserve's authority to require corrective actions should be limited to instances where overall financial market stability was threatened." Other regulatory agencies are to defer to the Fed, and to "streamline" - translation: water down - existing rules.
Now, let's dig into this. As any free market scholar would tell you, Paulson's plan to give more power to the Federal Reserve runs entirely contrary to the wishes of the Free Market's most ardent supporters. For those of you who missed the memo, the Free Market powerhouse and poster-boy Ron Paul ran for president in 2008, amassing millions in record-setting fundraising extravaganzas by promising to abolish the Federal Reserve. So, let's keep one thing clear. The Federal Reserve obstructs the Free Market. It is an impediment to and the primary obstacle standing in the way of the Free Market.
The Federal Reserve caused the market collapse you are witnessing right now, by artificially lowering interest rates in 2002-2004 in order to prop up the side-winding stock markets and to spur on perceived GDP growth in advance of the 2004 elections. They were under tremendous political pressure to do so, just as they were under tremendous political pressure to arbitrarily increase the prime lending rate in 2006, due to public fears over inflation caused by the skyrocketing supply of US Dollars in the market resulting from their easy-money policies in 2002-2004. When the money dried up as a result of this increase in the interest rates, housing and mortgage-backed security bubble collapsed.
Robert Kuttner needs to get it through his head--the government interferes with the markets. The Fed enables financial firms to borrow money at low-risk premiums, make risky gambles with it, and all with the promise that if the gambles turn out well, these firms can keep the profits. If the gambles fail, the Fed will bail them out, as it bailed out Bear Stern. It's like going to the casino and knowing that if you win at slots, you keep your earnings. If you lose, the Fed will bail you out.
A real Free Market Solution would look like the following:
If someone makes a bad investment, they should take the pain. If they can't handle the pain, they'll learn not to take risks they cannot afford. Caution and wise investment has for too long been denied its place at this nation's dinner table. Cautious investors, more discerning and careful participants in the market deserve to be rewarded for their diligence and held up as examples of the gravity of real adult financial interactions. Daredevils who try to exploit conditions to flip homes and drive up the prices in the market are contributing to holding back an entire generation of Americans from home ownership and raising a family. Now the Congress wants to inject itself into contract agreements and destroy any incentive lenders have left to enable young people to buy homes. It has to stop.
When the Fed comes rushing in to prop up a sagging economy, it assumes it has the capability of doing this. In fact, it does not. Its interactions as the "invisible hand" are more visible now than ever. So, if Kuttner is going to speak up about the Free Market on the pages of a respected newspaper before a global audience, he should take care not to mischaracterize the Free Market's stance on this issue. Many people claim to be "in favor of free market capitalism", but the system we have right now is nowhere even close to that system. The constant meddling of our government and the Federal Reserve in the markets more closely approximates socialist governments they so readily scathe.
Nothing personal against Kuttner, but he shouldn't mischaracterize Free Market thought, or somehow try to lay the blame on precisely they who have not been listened to during this entire fiasco. He invites even more interference and meddling by doing so, and aggravates the wound.