11/28/2008: "Bitter economic lessons still not learned"
In an article entitled "Bitter economic lessons learned" (Saskatoon StarPhoenix Friday November 28, 2008), Joe Jeerakathil writes regarding the current economic downturn:
The ascendant market fundamentalism, which upheld religiously that an unfettered market left to its own devices will offer the best path to economic nirvana, became the gospel of the Reagan revolution. Uncritical embracing of this orthodoxy led U.S. lawmakers to loosen the role of regulatory bodies in the pretext of promoting easier flow of capital. Wall Street enjoyed a free hand. The result has been the current mess. ... [Economists Keynes and Galbraith] warned the world about the endemic instability of the free market system with its cyclical swings.
Whoah. Not so fast there. Since when has Wall Street enjoyed a truly free hand?
As said in the article, a good deal of the current market troubles are a result of the collapse of the sub-prime mortgage markets. The whole sub-prime mortgage market was created by government telling banks that they must make loans into situations where it did not make economic sense. Then the government told the banks how to package up these sub-prime mortgages into packages with other loans and sell them on the market as if they were high-quality investments. One recent loosening of the regulations on US banks has been widely hailed as reducing the severity of this collapse, even by those who initially opposed it.
Another part of the market troubles come from an artificially low interest rate set by the Federal Reserve. With the interest rate being set for long periods of time lower than
the inflation rate, the fed was effectively giving away money. This has the effect of completely skewing long-term investment and purchasing decisions, leading to overconsumption and excessive debt, both personal and corporate. The cyclical swings cited in the article are a result of the Federal Reserve setting the interest rate different than the natural interest rate.
To paint these problems as a result of a supposedly unfettered free market is extraordinarily misleading.
(If anybody can find an URL that includes the above article, I would be grateful. It is not on the StarPhoenix's web site with most of the other content from Friday's paper.)