Connecting the Dots

Failure!!

Historians may someday eulogize the death of the free market economy. It did not die with a soft whimper. It wasn’t eroded away in gradual silence. It came down with a precipitous bang like a meteor sailing through the ceiling of a glass house. And, in the end it will be blamed on lack of market discipline, or inadequate risk evaluation, or a failure of moral suasion. Of course, those are all euphemisms for saying we stripped away all of the controls and safeguards and we couldn’t be trusted with that freedom. Our sense of greed and personal interest trumps our sense of future security, sustainability and right and wrong.

The blame should not be assigned in a limited way. Clearly, Wall Street lacks a moral compass by definition. Cutthroat capitalism, mortgage tomorrow for today’s profit, and aversion to openness or regulatory scrutiny form the bedrock of its treasured value system. If you need a recent example, last week Wall Street was very content to continue to eat its own until a temporary ban on the practice of short selling was put in place. That ban called for immediate disclosure of short sale positions, which was loudly resisted by many in the investment community as it would expose the specific profiteers who had been responsible for the deterioration of the stock value of friends’ and colleagues’ companies. While a legal practice, and a necessary one, short selling has been used in recent weeks to raid perfectly sound institutions. That sort of sounds like no market discipline.

Commercial banks should have known better. After all, we are used to regulation and having to live with the consequences of our failures. You simply don’t make a bunch of bad decisions and walk away from the banking industry that cleanly. Or, do you? If you follow the career paths of the CEO’s of some of the nation’s large banks, failure has paid them more in cash than success. By inadequately judging and managing risk, they are vested in retirement packages that leave them risk free for life. Of course, that is after paying legal fees to fend off bothersome shareholder lawsuits, and having to go through humiliating congressional hearings.

Finally, it is very unpopular to blame the borrower. Wall Street, banks and mortgage brokers were all throwing money at them. How were they supposed to resist? If someone came and said you could have the house you couldn’t afford, wouldn’t you borrow the money you couldn’t pay back? Obviously, it makes sense. Now, the bank’s should take responsibility and reduce that mortgage by taking huge losses that make them financially unstable, which forces the federal government to come in and bail them out. It all makes sense. Of course, that bailout will require increased taxes and foster stagnant or deteriorating economic conditions for a decade to come. So, in summary, it is not the borrower’s fault as they are not responsible for their own actions and shouldn’t bear the consequence. Let’s move the problem from the balance sheet of the bank’s, who couldn’t help themselves, to the balance sheet of the taxpayer, who may or may not have participated in the problem. It sort of sounds like a failure of moral suasion.

Alas, who killed the free market? It was suicide. By abdicating personal responsibility, sensible risk taking, and market discipline and controls, free market capitalism fell on its own sword. And, in its last dying breath it pleaded for the government to intervene and save its bacon. In doing so, it ushered in an inevitable era of government control and ownership, regulation and high taxation. President Reagan’s dream of smaller government is now firmly stuffed in the back pockets of those who were once its strongest advocates,