TheMillerCircle.org

Most Americans do not understand that once the free market economy got started under Ronald Reagan, as strongly advocated by radical economist Milton Friedman, it took over as the model for a unified global economic system, with blind advocacy, as if a new religion had been born with its own Shaman in Friedman. Its arrival marked the beginning of the end of the regulatory control mechanisms and the more centralized economy established under FDR during the New Deal and the Great Depression–the mother of all depressions. But, with the collapse of Fannie Mae, Freddie Mac, Bear Stearns, AIG and Merrill Lynch, coupled with the previous downfall of Long-Term Capital Management in 1998, we are seeing the true impact of the free market economy and the emphasis on the computer modeling premise on which the economists tried to make us believe that their vocation is a true science, just like physics, math and chemistry. Equations can determine everything.
Left to correct on its own, a free market came advertised as a system that would solve each and every dilemma if you just give it time and keep a hands off policy. Any instance of failure was quickly attributed to the need for less regulation, not more: the system failed because there was still too much regulatory control. You heard that kind of free market plea recently when McCain spoke about the cure for the the sub-prime mortgage fiasco. So far we have only seen the collapse of the financial market, we have yet to see the behavioral outcome that determines our consumer-based economy.

All Republicans still believe in the free market economy as the panacea, even though it is impossible to veiw that system as anything but radical and dangerous: an economy based on gimmick instruments is an economy doomed for trouble. This new system was believed to be the panacea for the ages. As Wall Street and the business community pushed for and received less and less regulatory control, many new financial instruments began to flourish as investment wizardry began its exponential growth: and with it grew exponential leverage of the stock market, now exceeding the kind of leverage that was in evidence in the crash of 1929. The frenzy of false profits was created ; new investment instruments, some very cleverly developed in the form of elegant differential equations, were supposed to reduce risk, not enhance it. Yet, the shear magnitude of the failures we have seen recently unequivocally reveal the shattered, utter incompetency associated with that kind of investment strategy. And the universal reasons for its failure are very clear: you can’t model human behavior!

The sub-prime mortgage fiasco, which is yet to run its full course and is a serious threat to our long-term economic stability, is only one of many investment devices that we only hear about when things go wrong. Yet, they always go wrong in the long run because of the underlying false premise on which they are built. Any modest success is followed by wild speculative behavior because of old fashioned greed. If the public would only realize that the free market economy is a pure sham, which allows the additional transfer of wealth from the poor and middle classes to the wealthy, we might have a full scale civil war. But the complacency of the public and their passivity in dealing with these issues means that the free market mentality will be in force until something more dramatically bad happens to our economic security and future vitality. The Wall Street we knew is gone. But, as John Kenneth Gallbraith once said, the memory of Wall Street for its inevitable excess and disaster, lasts about ten years and then the process begins all over again.
As a result of these many failures, we are witnessing the re-emergence of federal control and participation in these companies, but it is unlike what it used to be and so radically different from the older FDR era because this new form of “stewardship” or “conservatorship” facilitates and reinforces recent extravagant behavior, rather than trying to reel it in. This new form of control that we are witnessing at Fannie Mae and Freddie Mac, Bear Stearns, AIG, Merrill Lynch and the others that are likely to come, may yet produce the true mother of all financial collapses, created by the conversion of investiment risk into public debt that may exceed our capacity to pay. These plans do not put the brakes on the over-leveraged strategies and expansionistic state of Wall Street. A new form of over-drive will surely be riding on the tail winds of this disaster. Instead, by allowing continued privatization of profit, while making the public assume all the risk, we are encouraging further speculative financial instruments, fed by ever more complex mathematic models, each purported to be the stuff of genius. As a result, the next few years may prove to be the most dangerous financial period in our history: unwinding what we have allowed to transpire during out watch will be done with the magnifying glass of politics and the competition between regulation and de-regulation will simply take a different form, perhaps one below the radar screen of the day, to only reappear in a similar form a decade or so down the road: the end result of these agreements encourages all investment firms to believe that if they should get into trouble, the Fed was bail them out. Who wouldn’t feel liberated by this kind of arrangement. You may have noticed that the word “conservator” was used to describe the Federal Government’s new relationship to Fannie Mae and Freddie Mac. Those words are precisely the same words that FDR used in 1933, when he solved the banking crisis. But, his solution did not nationalize the bank system, as many hoped he would do. He found a solution that was acceptable to the bankers, not a solution derived from a philosophical commitment to socialism. Do you think you will ever hear a free market economist admit that he is forced to rely on the device that FDR used to solve the banking crisis of 1933? Ask one and see.