We have heard
it for some time now: the market is divine, lending its magical
corrective qualities to sort out the good from the bad.
A character portrait of George Bush by a former teacher of his,
Professor Yoshi Tsurumi (March 1, 2004), recalled a pupil's suspicion
of such monitoring bodies as the Federal Trade Commission and
Securities Exchange Commission. These bodies were 'unnecessary
hindrances to "free market competition".' The New Deal received
characteristic opprobrium - it was 'socialism'. As for poverty:
it was the simple result of a poor work ethic.
more qualified to assess the levers of the market, Alan Greenspan,
added a few pointers to this bald-faced view of market forces.
In the late 1990s, when the hedge fund Long-Term Capital Management
was registering losses in the billions, Greenspan, as Federal
Reserve chairman, attempted to initiate a rescue package that
would still keep the free marketeers happy. After all, the economy
would, in time, re-order itself.
But not even
Greenspan was willing to let things float. As he put it in his
testimony to the House Committee on Banking and Financial Services
(October 1, 1998), the Federal Reserve had taken some measures
to facilitate 'private-sector refinancing' of LTCM. With characteristic
opaqueness, he argued that the Reserve's measures 'were designed
solely to enhance the probability of an orderly private-sector
readjustment, not to dictate the path that adjustment would take.'
Despite some tinkering, free-market orthodoxy would remain.
of political economy at Harvard, Benjamin M. Friedman notes (New
York Review of Books, March 20) various attempts at regulating
heated economic activity in this decade were rebuffed. The US
Treasury suggestion in 2001 that subprime lenders subject themselves
to monitoring, with a 'best practices' code, and the Department
of Housing and Urban Developments attempt to control real estate
transactions, all came to nought.
global subprime crisis has triggered bailout strategies
across several countries. This suggests a grand admission:
the market is not magical in its self-corrective wisdom,
and its harmful effects must be neutralised.
suspicion of regulating agencies on the part of the Bush administration
(by no means the only one) and a system of buccaneering capitalism
has led to one sad truth: the private sector is inviolable when
it produces; and a needy cripple when it doesn't. When it performs,
there is a rush to praise executives and line their wallets they
made the right decisions, and did the company good. Company profits
are a result of business acumen, the genius of market capitalism.
company fails, we must all fail with it. Corporate success is
the success of the few; corporate failure, a collective one. This
is the underlying message of salvaging measures by governments
and their regulatory bodies. The global subprime crisis has triggered
bailout strategies across several countries. This suggests a grand
admission: the market is not magical in its self-corrective wisdom,
and its harmful effects must be neutralised.
of free market apostates is growing. Governments, after peddling
the wonders of robust competition, are now viewing it with fear,
even panic. Previously feted market ideologues are either shedding
their skin or going into hiding.
the most recent example of apostasy: the Federal Reserve's actions
regarding Bear Stearns. With the demise of the mortgage securities
specialist, Ben S. Bernanke and his fellow governors decided to
ditch the policy of non-interventionism. Bloomberg correspondent
Craig Torres provided a précis of the action: treasury
notes would effectively be swapped for 'privately issued mortgage-backed
securities held by Wall Street firms' (March 15). Willem Buiter,
economics professor at the London School of economics shuddered
at the policy shift. This was 'socialism for the rich, which is
both inefficient and morally objectionable.'
had become creditors of the otherwise doomed enterprise. In the
words of Vincent Reinhart, former director of the Division of
Monetary Affairs, such actions were 're-drawing the relationship
of the Federal reserve with the rest of the financial system'
consequences of such bailouts are gradually coming to the
fore. The Federal Reserve is finding its resources depleted.
Numerous governments, despite a previously pathological
aversion to regulation, are suddenly nervous by unfettered
Britain, Gordon Brown, with Chancellor Alistair Darling at the
helm of the Exchequer, took a pseudo-socialist path. An ailing
Northern Rock, the Newcastle-based lender, has been, for all intents
and purposes, nationalised. Offers by such giants as Virgin were
dismissed as providing insufficient 'value for money to the taxpayer'
(BBC News, February 17).
to minimise the significance of the move, hoping to hide the British
government's new love for market control. 'The bank will be run
at arm's length and on a commercial basis.' With inverted logic,
the protection of Northern Rock has now become a collective duty
- tax payers are to foot the bill of failed private speculations
because it's in their best interest to do so.
on the continent have faced similar problems, with now familar
government responses. The German banking system suffered the jitters
last summer when IKB Deutsche Industriebank fell on the sword
of American subprime speculation. A third bailout of the dying
beast was assured in February this year by German finance minister,
Peer Steinbrück. While private banks were expected to foot
some of the bill, the government would provide two-thirds of the
US$2.2 billion dollars. The list of bank welfare recipients continues
of such bailouts are gradually coming to the fore. The Federal
Reserve is finding its resources depleted. Numerous governments,
despite a previously pathological aversion to regulation, are
suddenly nervous by unfettered competition. While the Free Market
deity is far from dead, it is expiring.
amidst the economic carnage, is unrepentant. Writing in his memoir,
The Age of Turbulence, he argues that 'the benefits of broadened
home ownership are worth the risk.' Given the current crisis,
with a shrinking base of homeowners, Greenspan may have been a
little too optimistic. For that, we are left with a socialism
tailored for the wealthy.
Binoy Kampmark was a Commonwealth Scholar at Selwyn College, University
of Cambridge. He can be reached at: email@example.com.He
blogs at Oz Moses.