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Free Markets vs. Crony Capitalism

Original post made by GX on Oct 3, 2011

Since the beginning of our current Recession, there has been much disparaging of our current capitalistic economic system. To not risk "throwing the baby out with the bath water", I think we need to get honest with our current market approach and how it differs with successful true free-markets approaches of the past. Please note that free markets don't preclude appropriate government regulations. Only when we have a thorough understanding of what has/hasn't worked in the pasts (and the associated underlying dynamics) can we craft the appropriate solutions to get us out of our current mess.

I found John Hussman's following brief yet cogent summary of the differences between free markets and our model of crony capitalism helpful – do note his second-to-last sentence:
I feel it is important to emphasize - as we move toward recession - that we shouldn't blame what is happening here on capitalism or free markets. We really have only a caricature of those here. We have a system that is constantly eager to abandon the proper role of government in the markets - which is effective regulation of risk - and to substitute it with the worst role of government in the markets - which is absorbing losses for those whose losses should not be absorbed, and pursuing policies tilted toward the constant creation of speculative bubbles and the avoidance of required economic adjustments, rather than the productive allocation of capital.
Free markets work - provided that they operate within a framework of government policy that enforces property rights, provides reasonable regulation, coordinates objectives that cannot be achieved privately (e.g. certain infrastructure, insurance coverage for pre-existing conditions - which otherwise creates an adverse selection problem even for companies that would like to offer it), and maintains reasonable consumer protection (because there is a huge "information problem" in requiring each consumer to have all of the requisite facts to avoid abusive practices). To blame our economic problems on the free market is an insult to what has proved for centuries to be the most effective economic system for creating prosperity and raising living standards. We would be wise to stomp out the incessant policy of bailouts and monetary distortions if we hope for that to continue.

Comments (13)

Posted by Main Street Jay Walker, a resident of Another Pleasanton neighborhood
on Oct 3, 2011 at 3:53 pm

First of all excellent post. The problem is that idealistic truism is not even in play today. Say any political / economic / social word of great depth and it will be turned on its head in a nano-second. But, to me it all boils down to GREED. That's the current sin. People made a lot of money with it (false housing appreciation, false banking bonuses, et al), and most people want what greed gave them back. There's no idealism in a false virture.

Posted by steve, a resident of Parkside
on Oct 4, 2011 at 8:37 am

Good post, GX. I noted the use of the term 'reasonable' throughout the topic and the subjectivity seems to be where most of the debate is.
One the one hand, you have the folks on the outside looking in, who may want the govt to micromanage every aspect of every transaction, which is obviously counter productive.
On the other hand, you have owners, investors, and othe stakeholders that want to eliminate needless overhead to remain competitive, not only in their local markets but also internationally.
I'm sure there's a balance that can be struck, as we've seen lately in Calif, as Gov Brown considers relaxing some regulations in order to keep businesses from their continuing exodus from the state. If he can do it in a state like Calif., maybe the feds can see reason as well.

Posted by GX, a resident of Another Pleasanton neighborhood
on Oct 4, 2011 at 10:45 am

The most powerful humankind force is self-interest and self-perservation. Free markets are effective given they leverage this basic dynamic.

Main Street Jay Walker, I tend to agree with your greed point. We have a very self-centered society focused on instant gratification regardless what the cost is for society as a whole. On one hand this is the fuel for our markets, on the other hand it can lead to distortions (e.g. our mortgage meltdown). Key question - what is the difference between self interest/preservation and greed?

This is why even though I'm an ardent supporter of free markets, I recognize the need for appropriate regulations.

But Hussman's final point is key. We need to stop the bailouts (at all levels) and other market distortions.

Posted by dublinmike, a resident of Dublin
on Oct 4, 2011 at 9:57 pm

dublinmike is a registered user.

GZ comments: "To blame our economic problems on the free market is an insult to what has proved for centuries to be the most effective economic system for creating prosperity"
For what I am about to write I know you would likely call me a socialist, et al, but, the real importance is this: how do you explain the degradation of certain economic segments? Answer: Greed. The bases of Capitalism is, well, greed.

Posted by GX, a resident of Another Pleasanton neighborhood
on Oct 5, 2011 at 7:12 am

DublinMike - I agree with you that the basis of capitalism is self interest/greed. Is there a difference between self interest and greed? Does it matter?

Even if you assume the worst case, greed, capitalism has proven over hundreds of years to be the most beneficial economic system. This isn't to say there aren't negative artifacts associated with capitalism/free markets, and this is why appropriate regulation and rules-of-law are required.

To answer your question, globalization is one significant reason why there are are large differences among groups of people. Globalization has commoditized labor, opened markets and created scale advantages for some, arbitraged environmental and other laws, etc.

But Hussman is arguing that Fed policies have a lot to do with this. The Fed has enabled the huge expansion of debt which has helped the rich get richer and the poor sink under their own over-consumption. It also covered up for a long time how truly uncompetitive we are with the rest of the world. And it is also to blame for the gross mal investment of capital in this country - i.e. we have 3 million too many homes in this country.

Just think how different things could have been if 10-15 years ago we didn't have a Fed induced housing bubble? We would have faced our non-competitive issue sooner, we would have realized sooner that we have a significant education/skill gap, we would not have pulled forward years of demand (which has now created our current recession/depression) ...

Time has proven that Fed induced bubbles and market distortions are not a good thing.

Posted by steve, a resident of Parkside
on Oct 5, 2011 at 8:35 am

"Just think how different things could have been if 10-15 years ago we didn't have a Fed induced housing bubble?"

Now we're onto something....I assume you mean the Freddie/Fannie debacle that promoted home ownership for the least qualified of society? Politicians pressured banks to accept bad credit risks and the economy spiraled downward from there as a result.
It makes you wonder what people like Barney Frank were thinking...and he's still employed representing people who still think this was a good idea that the lending institutions botched. Amazing what our society has devolved into............

Posted by D W, a resident of Another Pleasanton neighborhood
on Oct 5, 2011 at 10:20 am

Free markets are free? That's news to me. Can't trust government; can't trust the markets as they have no face, mind, or heart; can't trust numerous pulpits due to various levels of psychological oppression as shown through the media; and definitely can't trust pundits whose reckless rhetoric is only for lazy entertainment purposes.

So what's left? People. The right people. If you don't want to worry about over-regulation or greed, it helps to be connected to the right associates, friends, and even family. Trust your instincts. That's how everyone makes it in life & society.

Posted by Patriot, a resident of Another Pleasanton neighborhood
on Oct 5, 2011 at 10:48 am

"I assume you mean the Freddie/Fannie debacle that promoted home ownership for the least qualified of society? Politicians pressured banks to accept bad credit risks and the economy spiraled downward from there as a result."

I think he was talking about the Federal Reserve pushing interest rates way too low for way too long. There was a lot more to the housing bubble than just Fannie and Freddie. There was also the FHA backed zero money down loan. There was the tax exemption for up to $500,000 of capital gains from home sales. There was (and is) the tax deduction for mortgage interest. There was OTC derivatives market that sold credit default swaps on mortgage backed securities (think AIG for example), and yes AIG "botched" it big time, and we the tax payers picked up the tab.

Posted by P-town Dad, a resident of Amador Estates
on Oct 6, 2011 at 8:54 am

GX, great post. I agree with you 100% that our survival instincts can produce a power incentive for protecting our self-interests. However, when good people feel secure they are more willing to help others. Greed happens when people have more than they need, and are unwilling to share their blessings with others, and instead focus on gaining more for themselves.

The USA is the most philanthropic country in the world. The wealth creation in our country fuels that. When government intervention slows wealth creation, everyone suffers, regardless of income. Those less fortunate who rely on Shepherd's Gate, Open Heart Kitchen, Tri-Valley Haven, etc all suffer from lack of resources when philanthropy is pulled back.

Also, like many things in life, extremes can be harmful. The desire to be self-reliant and to help others is good, and capitalism enables that better than any other system. Greed is harmful on many levels. Government regulations that reduce pollution have been great for our country, as anyone who knows what China is like today can attest to.

Extremes can be bad or good, regardless of what labels may be put on people. Steve Jobs deserves every penny he earned. He created his own wealth. He created jobs for tens of thousands of people at Apple, plus all of their suppliers...oh, and all people that worked at companies that made accessories and software for Apple products.

On the other hand, bank execs who allowed excessive risk in the financial markets to occur while racking up millions in compensation are just as corrupt as Frank Raines who paid himself $91 million from 1998 through 2004, while running Fannie Mae - A government sponsored entity!

Extreme political views, whether on the right or left are damaging to our nation's spirit. I personally can't stand either Rush Limbaugh or Al Franken. They are the same extreme, divisive spirit on either side.

Not all corporations are bad. Not all liberal Democrats are bad. Not all conservative Republicans are bad. Rather than labeling and judging people it would be more productive if our national discourse, fueled by media, focused on discussing the merits of individual issues.

Hope that helps the discussion.

Posted by GX, a resident of Another Pleasanton neighborhood
on Oct 6, 2011 at 10:07 am

P-Town Dad - The world would be a much better place if we had more people who were issue-based rather than political party/dogma based. I've seen both sides limit their effectiveness by blindly supporting a position regardless what reality suggests.

On banks vs.true wealth creators like Jobs, one needs to ask what structures are in place to let this happen. On one hand people like Jobs are driven by competitive markets and their own passions to create what wasn't there before.

On the other hand, think about all the dysfunction that needs to be in place to enable non-value-added bankers to make the money they do - lack of true market based competition, ineffective regulation, corporate welfare, bought politicians that look the other way, apathetic pbulic that don't care until the problem becomes too acute or inconvenient ...

I wonder what it is going to take for the average person to educate themselves on what is going on and then hold their elected representatives truly accountable.

Posted by Main Street Jay Walker, a resident of Another Pleasanton neighborhood
on Oct 6, 2011 at 8:50 pm

This was the best thread I've read in a long time.

Posted by No cronies wanted, a resident of Another Pleasanton neighborhood
on Oct 7, 2011 at 10:04 am

Crony capitalism cycle: like Solyndra officers, being major Obama donors, and Obama giving back same donors $500+ Billion taxpayers dollars, team appropriately donates more, loan rewritten so taxpayers are placed in third position, pretty much assuring we wil never be paid back. .. worked pretty slick, that's real recycling.
But it made a good backdrop for Obama photo ops, and green lectures, and promises about the miracle of green energy.
Of course the only real 'green' is nuclear...unlimited supply and totally carbon-free.( but remember it wasn't really about energy)

Posted by Freeman, a resident of Dublin
on Nov 9, 2011 at 4:20 pm

Capitalism is an old and in the way system. It has run its course and now must evolve and be made use of; a system all of us created that has lead to GREED and power issues that conform to those who wish to make use of power--mostly for all the wrong reasons.

Truth is; no one really has a solution as to how to uplift the status of the world's economy. Therefore, we are destined to find a new and better solution, one that will do away with taxes and will provide for all. The sooner we find the courage to do this the better.

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