News Did the 2008 Financial Crisis Mark the End of Free-Market Economics?

[mheslep]

... I believe Adam Smith assumed market participants were honest and likely practiced Christian principles. I'll refer to my library on that.

Hmm no. For the latter see Theory of Moral Sentiments
http://www.econlib.org/library/Smith/smMS.html

 

[mheslep]

An apropos analogy I just heard:

Saying free markets are responsible for the various economic problems and recessions is like saying gravity is responsible for air plane crashes. Yes that's true, but it also completely misses the point of what went wrong.

 

[turbo]

An apropos analogy I just heard:

Saying free markets are responsible for the various economic problems and recessions is like saying gravity is responsible for air plane crashes. Yes that's true, but it also completely misses the point of what went wrong.

Let's take a breath. Gravity is pretty relentless and consistent. "Free markets" are poorly defined and slippery, depending on who you want to talk to. Our government advances the causes of corporations and large special-interest groups because our elected officials WANT and require money and influence. to stay in power If you think any free-market model can explain the crap that the US economy has been experiencing in the last 10 years, have at it!

 

[edward]

This is one type of market activity that angers me. Legal, yes. Ethical, no way. This was last Dec after the crash.

Dec. 10 (Bloomberg) -- Goldman Sachs Group Inc., one of the top five U.S. municipal bond underwriters, is angering politicians and public-finance officials in New Jersey, Wisconsin, California and Florida by recommending that investors purchase credit-default swaps to bet against 11 states’ debt.

It’s “disturbing” to advise investors to bet against the financial health of a state whose bonds Goldman helps sell, Assemblyman Gary S. Schaer, a Democrat who chairs the Financial Institutions and Insurance Committee, said last week in a letter to Chief Executive Officer Lloyd C. Blankfein.

http://www.bloomberg.com/apps/news?pid=20601109&sid=ac9AV.yzTCNw&refer=home

 

[Mattara]

Regarding my comment on private security companies. Of course it is entirely compatible with a free market to install an alarm or bars on your store when it is closed, for instance. I did not mean to imply anything harsher. If everyone has perfectly honest, then no such things would be needed obviously. Now, I do not know how much large this industry is, but it is most likely not completely negligible.

 

[Mattara]

Let's take a breath. Gravity is pretty relentless and consistent. "Free markets" are poorly defined and slippery, depending on who you want to talk to. Our government advances the causes of corporations and large special-interest groups because our elected officials WANT and require money and influence. to stay in power If you think any free-market model can explain the crap that the US economy has been experiencing in the last 10 years, have at it!

Well, I would like to propose at least two defining characteristics for a free market: the non initiation of violence and the ability to write voluntary contracts. There are probably much more that can be said about it, of course.

 

[bleedblue1234]

I still don't understand why people are confusing cause and effect of the crisis scenario we experienced this past year. It was NOT a failure of the free-market system, rather a failure of government in the sense that they provided the necessary capital to leverage up and to overexpose the financial institutions to toxic assets because they could make the mal-investments.

 

[Astronuc]

. . . . government in the sense that they provided the necessary capital to leverage up and to overexpose the financial institutions to toxic assets because they could make the mal-investments.

Please provide the evidence that the 'government' provided capital.

As far as I can tell, lots of private investors and investment institutions put up the capital, and companies like Bear Stearns, Lehman Bros, Merrill Lynch took the money and bet it on high stakes investments. AIG and others involved in credit default swaps added to the risk by over-extending themselves.

If one is referring to Fannie Mae and Freddie Mac - I believe their capital came from or through Wall Street, and perhaps other exchanges.

The government certainly is responsible for their share of irresponsiblity.

Of course, there are the millions of individuals who mortgaged houses and run up credit debt well beyond their ability to pay. That's why bankruptcies and credit card/mortgage defaults are at record highs. The government did not force any private individual to borrow more than they could afford.

 

[Jasongreat]

Of course, there are the millions of individuals who mortgaged houses and run up credit debt well beyond their ability to pay. That's why bankruptcies and credit card/mortgage defaults are at record highs. The government did not force any private individual to borrow more than they could afford.

They didnt force anyone to borrow more than they could afford, but they did allow them to borrow money at very low interest rates, making it seem like they could afford it(atleast easier justification). Would people be more likely to buy a house that was over priced if they had to pay 10% interest on the overvalued amount or would they be more likely to buy an over priced house if they paid 0% interest on the added value, or easier yet are they more likely to pay more than the actual value if they only have to make interest payments and hoping the market will continue to grow? When after most of the twenties the market started to contract, Hoovers administration decided to lower interest rates to fuel more growth even though the market was trying to say it was over valued and needed to shrink, and as I see it the market is far more powerful than the government could ever hope to be and will always win in the long run. Eventually no matter how much interference the government inserts in the market it will eventually collapse as it did during the great depression. Why would we expect a different outcome when Bush did the same thing, it was government involvement in the market that destroyed the market, then the government said it had to interfere in the market even though that is exactly what caused the problem in the first place(regulated through interests rates not laws), and let's not forget they gave billions of our dollars that they forced us to pay to help stabilize the inflated market(bank bailout).
If we look at AT&T, the government started regulating them with the sherman antitrust act, which wasnt working since the courts decided that mergers did not create a monopoly even though they no longer had any competition as they were all part of the same company. Then came the kingsbery commitment, where the government realized that AT&T was a monoploly but that they would just regulate them better. Then about 60 years later(1984) the government decided they couldn't regulate that big of a company and made them dissolve into a bunch of smaller companies. So IMO the government sponsored their merger and the use of the power of monopoly for about 90 years, before they forced them to return to where they started, as a bunch of smaller companies. Wouldnt it have been easier as well as more logical for the government never to sponsor the mergers in the first place?

 

[Jasongreat]

Free market assumes honest participants.

I think a free market assumes everyone is dis-honest, not until the government starts to regulate would any sane person think that someone trying to sell them a product is completely honest. Remove the regulation and people would no longer trust buisinesses blindly,imo. One example that comes to mind is the drug ads where the spokeperson states that "the drug is completely safe since the FDA has approved it"(i think it was the abilify ad with winonna). It doesn't take a very long search to find numerous instances where the FDA has approved a drug as safe only to find thousand of americans dying from the proper use of that drug(phen-phen, viox, etc). My question is did those thousands die because of regulation or from the lack of regulation? My opinion is that if the regulation didnt exist, they would of had to research more into the drug before making an informed decision, they wouldn't of been able to reason that since the government regulates it, it has to be safe.

 

[noblegas]

Free economics doesn't exist. I challenge you to find me a market completely run by free market economics.

The problem with free markets is that they can produce oligopolies and monopolies by natural barriers that come with certain markets.

Whats your point? Just because a certain ideology has not been implemented or adopted by existent and previous societies , you come to the faulty conclusion that it will not work.

At one period in human history, virtual all societies on Earth had slave populations. If someone like you were to say to an abolitionist, 'society would descend into chaos if we did not have slavery, show me a prosperous society without slavery',there would not be steps taken to eliminate slavery

 

[mheslep]

Whats your point? Just because a certain ideology has not been implemented or adopted by existent and previous societies , you come to the faulty conclusion that it will not work.

At one period in human history, virtual all societies on Earth had slave populations. If someone like you were to say to an abolitionist, 'society would descend into chaos if we did not have slavery, show me a prosperous society without slavery',there would not be steps taken to eliminate slavery

That post to which you are replying is from November last year.

 

[mheslep]

Interview w/ Stanford economist John Taylor, author of the widely used http://en.wikipedia.org/wiki/Taylor_rule" governing money rates.

http://tv.nationalreview.com/uncommonknowledge/post/?q=OWE0YzIwN2VkYzBkYWNjMDczMThjODVjMjZlNjI2N2E=" , 6:00.
Commenting on French President Nicolas Sarkozy's statement:

"The all powerful market that is always right, that's finished."​

Taylor:

"Absolutely not. [...]If you look at this carefully, don't be idealogical about it, don't be political. [Then] we see a crisis that was caused, prolonged, and made more severe by government policy, not by failures in markets."​

Which agrees w/ what I've read/seen.

 

[mihna]

http://www.jstor.org/pss/1884183"

Proves that one of the axioms of a free market model is demonstrably false(equal access to data). The existence of bargains is due to inherent information deficits during the exchange process.

This speaks volumes about capitalism in general really.

 

[DrClapeyron]

Proves that one of the axioms of a free market model is demonstrably false(equal access to data). The existence of bargains is due to inherent information deficits during the exchange process.

That hurts my head to read, could you translate it?

**** happens, but we need to learn something useful from our success as well as our failure...with out crying and apologizing too much.

 

[mihna]

That hurts my head to read, could you translate it?

**** happens, but we need to learn something useful from our success as well as our failure...with out crying and apologizing too much.

They ran a game theory simulation w/ 2 people(representing buyer and seller). With stakes in two different outcomes(representing a market exchange). One side would have access to more information then the other. The party with less data is basically left with two options. 1. Hold out as long as possible to try to deduce more information from the informed party, which would lower his losses. Or opt out of the exchange all together and hope making the deal is more important to the informed party then a bargain.

One of the tenets of free-market exchange is equal access to information across the board but the existence of a "bargain" shows this is false. Untrue axioms...don't bode well for a theory

 

[Al68]

They ran a game theory simulation w/ 2 people(representing buyer and seller). With stakes in two different outcomes(representing a market exchange). One side would have access to more information then the other. The party with less data is basically left with two options. 1. Hold out as long as possible to try to deduce more information from the informed party, which would lower his losses. Or opt out of the exchange all together and hope making the deal is more important to the informed party then a bargain.

One of the tenets of free-market exchange is equal access to information across the board but the existence of a "bargain" shows this is false. Untrue axioms...don't bode well for a theory

That's not one of my tenets, and most here would call me a free market "radical extremist". But free enterprise isn't some cooked up theory, it's just what most people do when free to do so. It's a consequence of economic liberty, not some "system" imposed by government.

Besides, in that simulation, unequal access to information was assumed, not proven. It simply showed the result of assuming unequal access to info in the simulation.

If I ran a simulation assuming that all cars were blue, would the result "prove" that all cars are blue?

 

[mheslep]

One of the tenets of free-market exchange is equal access to information across the board but the existence of a "bargain" shows this is false. Untrue axioms...don't bode well for a theory

Information symmetry is not an axiom, it is a variable in microeconomics.

 

[MFriedmam]

Free market never fails without government intrusion

Socialism has a long history of fails not capitalism

 

[Mgt3]

Free market never fails without government intrusion

Socialism has a long history of fails not capitalism

The free market failed pretty badly last year. Without government intrusion. Libertarian economics is for the simple minded.

By the way "MFriedmam", socialism is not the only other option to free market capitalism and mere government intervention in markets is not socialism. Go back and learn economic terms before you go throwing them around.

 

[mheslep]

The free market failed pretty badly last year. Without government intrusion.

Without government intrusion? On which planet?

 

[DrClapeyron]

This is America, we have an American-market. The idea of free-market is for women, children and wimpy college nerds. We are the star quarterback on the #1 ranked school: get as many girls as you can while the going is good. That my friend, is the American-market.

 

[Al68]

The free market failed pretty badly last year. Without government intrusion. Libertarian economics is for the simple minded.

By the way "MFriedmam", socialism is not the only other option to free market capitalism and mere government intervention in markets is not socialism. Go back and learn economic terms before you go throwing them around.

You might try looking up "free market". "Mere government intervention" may not be socialism, but it's certainly not a free market either. It's called a "mixed economy".

The failure you referred to was a failure of the mixed economy, not of a free market. It not only would not, but could not have happened in a free market for reasons obvious to anyone with a mediocre knowledge of what happened.