Charles Wheelan, Ph.D. The Naked Economist
Charles Wheelan, Ph.D., The Naked Economist
The Twilight of Free-Market Ideology
by Charles Wheelan, Ph.D.
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Posted on Friday, October 24, 2008, 12:00AM
When I heard Alan Greenspan's testimony before Congress last Thursday, I had one immediate thought: This is the beginning of the end for the free-market ideologues.
According to press reports of the testimony, Greenspan told Congress that he "had put too much faith in the self-correcting power of free markets." That's no small statement.
In fact, it struck me that if 1989 was the year when no reasonable person could still believe in communism (or any of its government-intensive relatives), then 2008 will go down in history as the year in which the free-market zealots saw their "wall" come crumbling down.
Too Free to Last
You don't have to take it from me. Just look around. One by one, the economic meltdown is slaying one shibboleth of the uber-free-market camp after another.
Here are some of the inflexible, hardcore beliefs that are crashing along with the stock market:
• Individuals always know best
Not so much, it turns out. The whole financial crisis is rooted in irrational personal decisions. Consumers borrowed more than they could afford based on the naive assumption that housing prices would always go up. Not just a few people -- lots and lots of them.
• Firms always manage resources better than government
Let's take a poll of Lehman Brothers shareholders to see how they feel about that statement. One of the most remarkable things about the whole crisis is the amount of wealth destroyed by private firms. The shareholders and managers of firms like Bear Stearns, Lehman, AIG, Countrywide, and others destroyed themselves.
That can't be blamed on flawed regulation. No matter how bad the regulatory scheme, it's never rational for private firms to destroy themselves along with all of the wealth of their shareholders.
It's definitely true that government incompetence deserves a share of the blame (e.g., Fannie and Freddie, or the push to put low-income citizens in homes they couldn't afford), but that doesn't make blindly eliminating regulations the answer. Deregulation and sensible regulation are not synonymous.
• Tax cuts are an economic miracle balm
I suppose one could argue that the economy would be in even worse shape right now without the Bush tax cuts -- but that's pretty thin gruel. The more reasonable argument is that the deficits that have accumulated over the last eight years -- during relatively good economic times -- are a hugely destabilizing force going forward. Everything happening right now is made much worse by the fact that the United States is highly indebted to the rest of the world. The ideologues pushed tax cuts without demanding corresponding spending cuts, and that's just plain irresponsible.
Three entities borrowed recklessly over the past decade: homeowners, Wall Street, and the U.S. government. So far, only two of them have had their reckoning.
• Less government is always better
I don't think most Americans are prepared to tell Hank Paulson and Ben Bernanke to leave the markets alone right now. Nor are they pushing for the FDIC to scrap the insurance on bank deposits. And many of us are wondering: 1) What is a credit default swap? 2) How could something I've never heard of be destabilizing the economy? and 3) Why didn't someone do something about this?
Does all of this mean that economics books should be burned and Nobel Prizes returned to Stockholm? Absolutely not. The free-market zealots were never right in the first place; they twisted, bastardized, and oversimplified conventional economic thinking. They saw simplicity where the bulk of economists saw tradeoffs and qualifications. They clung to simple and elegant views despite all evidence to the contrary -- and the analysis in the first 10 chapters of any basic microeconomics text.
A colleague of mine, who worked in (and was frustrated by) the George W. Bush administration, coined a term that summarizes it best: faith-based economics. That's not supposed to be how it works.
• Mainstream economists have a profound belief in markets
But they also understand that markets fail in some cases. And they recognize that most markets work better with some government infrastructure, whether it's information, modest regulation, or just a place to sue someone who cheats you.
Mainstream economists recognize the costs of taxation; taxes take money out of people's pockets and distort behavior in ways that can have serious economic costs. But the non-ideologues also recognize that tax revenues can be used to provide government services that make people better off. Good policy is about managing that messy tradeoff.
Mainstream economists recognize that individuals have a pretty good idea of what they want -- but that those same individuals sometimes make systematic errors of judgment, which can lead to things like bubbles and panics.
Mainstream economists recognize that too much regulation can harm innovation and diminish prosperity. But they also recognize that sensible regulation provides information and security, both of which make it much easier to do business with strangers. Regulation also protects third parties from market behavior that has negative spillovers, whether it's the guy who drinks too much at the bar before getting into his car or the paint factory that cuts costs by dumping lead in your drinking water.
A Monument to Self-Interest
There's now a museum in Berlin where visitors can go to see a remnant of the Berlin Wall and learn about the damage done by an overly rigid, poorly conceived ideology.
Maybe there should be some kind of 2008 Meltdown Museum. It would have a large subdivision of homes, all with "for sale" signs out in front. And there would be a quotation from Alan Greenspan inscribed over the arch at the entrance:
"Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief."
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Yahoo! Finance User - Monday, October 27, 2008, 2:16PM ET Report Abuse
o Overall: 1/5
Absolute piffle. There's a scad of journalists who love writing scary headlines and then making up a story to go with it. This is another in that vein. Stuff happens - given any set of information, the individual will ALWAYS know better than the government what's best for their self-interest. To claim that government (regulators) know better just because something big and bad happened is a logical non sequitur. In fact, it can be argued that government helped cause the problem in many ways. Was the government's role as a lender of last resort the buffer that caused so much unwarranted risk taking? Or perhaps it was the laws that forced banks to make subprime loans to meet the Community Reinvestment Act requirements. If a free market is a collection of free and willing opinions about value expressed in money, how dangerous and morally corrupt it is to say that free markets are dead! To the question about why so many people got it wrong for so long, the author suggests that the government would know better. Really? A collection of pundits and bureaucrats with no business experience sitting in a large grey building somewhere in suburban Virginia has more information than the smartest business minds around? That is absurd. Free markets can be volatile and they can be unstable. There is always a tendency for players to monopolize and temptation to misrepresent. The only role a government should have is to ensure transparency and honesty so that all players can make the best decisions for themselves. In this case, the complexity of the system did not allow full transparency and the risk management tools could not cope with the actual risks. Unless the government stays its regulatory hand and let's businesses fail and succeed on their own, the tools will never be developed, the system will not evolve and this will happen again.
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Yahoo! Finance User - Monday, October 27, 2008, 2:16PM ET Report Abuse
o Overall: 1/5
Anti Free Market Zealotry shall never win in this country. Separating the agent from the borrower with corrupt quasi public institutions like Fani and Fredi is the real cause of our current problems. Congress with 12% approval rating and collection of bird brains will fail again when it tries to regulate. Corrupt state politicians are incapable of regulating the insurance market "self interest" of lenders and regulation of Balance Sheets suppose to have been improved by Sarbane and Oxley. Incompetent regulators are not able to execute the current laws in the books let alone new ones. Alan Greenspan is a Washington Comic Character. He is more concerned with the next reception he will be attending with his wife. Why would anyone cares what he thinks about the current situation. The Washington Swamp needs to be drained. God Bless those who voted against the Poulsen plan twice.
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Yahoo! Finance User - Monday, October 27, 2008, 2:13PM ET Report Abuse
o Overall: 3/5
Having heard the many reasons for the financial state now it appears that no one simple reason can be attributed to the downfall. The concept of free market economics without right regulation seems misguided. Is not the lawmakers removing protective barriers (read: less regulation) in itself against the notion of government intervention?
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OxfordGrad - Monday, October 27, 2008, 2:12PM ET Report Abuse
o Overall: 1/5
Charles Wheelan, Socialist, Idiot, Yahoo Finance contributor. I can't believe this garbage is being spread on my beloved Yahoo Finance. You may be able to convince hippies and all the MTV liberals that this sewage is true but you won't convince anyone here. Take this drivel elsewhere. I laugh at you and your degree, you have lost absolutely all credibility not only with me but with every other American citizen with half a brain. You should be ashamed of yourself for taking the time to write this trash. Grow up, get a pair, and stop spreading lies.
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Chai - Monday, October 27, 2008, 2:12PM ET Report Abuse
o Overall: 1/5
We have had over twenty five years of prosperity with a low tax and regulatory structure. The fact that firms went out of business is part of capitalism. Government will never find the next Google, Microsoft or the Wright Brothers for that matter. It can though create wealth redistribution mechanisms which can help bring unemployment to over 10% for the first time in decades.
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Rick Underbrink - Monday, October 27, 2008, 3:03PM ET Report Abuse
* Overall: 1/5
These views are interestingly spun towards socialism. I disagree with them entirely.
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zzzzzzz - Monday, October 27, 2008, 3:02PM ET Report Abuse
* Overall: 1/5
Whoever is responsible for the Congressional oversight of Fannie and Freedie should be hung. Period.
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Yahoo! Finance User - Monday, October 27, 2008, 3:00PM ET Report Abuse
* Overall: 1/5
Can't believe this is in the "Expert Opinion" section.
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jcifonelli - Monday, October 27, 2008, 2:59PM ET Report Abuse
* Overall: 1/5
Mishmash of logic which completely ignores the basic fact that we do not and have not lived in an era of unregulated markets.
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Yahoo! Finance User - Monday, October 27, 2008, 2:58PM ET Report Abuse
* Overall: 1/5
Would someone please list for me the major economic deregulations that have occurred in the past 8 or 14 years that caused this mess? I havent been able to pin them down. But I do know that groups like ACORN use tactics that force banks to lend money to people who can't pay it back. Just wondering.
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Yahoo! Finance User - Monday, October 27, 2008, 2:55PM ET Report Abuse
* Overall: 1/5
You sir are a liberal idiot.
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dwlglobal - Monday, October 27, 2008, 2:53PM ET Report Abuse
* Overall: 1/5
And this guy claims to be a Libertarian
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Yahoo! Finance User - Monday, October 27, 2008, 2:51PM ET Report Abuse
* Overall: 1/5
Another gem from this fool. Go away, Whelan.
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Rick Cain - Monday, October 27, 2008, 2:51PM ET Report Abuse
* Overall: 5/5
Let's just be honest here. Wealthy people are to blame for it all. The government didn't force anybody to do anything...quite the reverse! They deregulated so much that the market went out of control. And its shameful that the same wealthy people now blame the poor for it all. The poor are the weakest, least politically influential, and have no stocks, no bonds, no hedge fund investments. The wealthy now want and got their bailouts. The free market cannot be stable without being heavily regulated. Another name for regulations is LAWS. Individuals must follow laws, and the market should too.
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ksechows - Monday, October 27, 2008, 2:47PM ET Report Abuse
* Overall: 1/5
You sir, are an idiot.
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Yahoo! Finance User - Monday, October 27, 2008, 2:46PM ET Report Abuse
* Overall: 1/5
He's become more and more socialist.
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Mahlalie - Monday, October 27, 2008, 2:44PM ET Report Abuse
* Overall: 1/5
As others have stated, this "crisis" was brought, in part, by the government forcing companies to make loans to people who couldn't afford it. Secondly, a historian would be able to tell you that the same things were being said back in the Great Depression. I think it's safe to say that, in spite of New Deal regulation, the economy rebounded nicely. Give it time. I trust the free market over any kind of "economic stimulus package" the government can hand out any day. Of course, I may change my mind if they cut the corporate tax rate and call it a "stimulus package." Also, please notice that the whole world is being impacted by the economy. Our relatively free market is the reason we remain the most competitive economy in the world.
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Yahoo! Finance User - Monday, October 27, 2008, 2:42PM ET Report Abuse
* Overall: 3/5
Consumer, Wall Street, and Government are all responsible for this mess. Each of them looked out for their own personal interest and short term benefit while no one was guarding the overall impact on society (also called greed). This article imparts pretty good clarity although it is hindsight.
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kerry b - Monday, October 27, 2008, 2:38PM ET Report Abuse
* Overall: 1/5
Whelan is fraudulently claiming that there is something wrong with a free market. Perhaps someone should tell him that the real estate market, with respect to loans, has NEVER been a "free market". At least not sioince before WWI when the Fed reserve was established. The failure of the real estate market can be attributed to two things : a fiklure of longstanding govt agencies to perform their traditional function and ensure that the financial system is sound, a large part of which is ensuring that our financial institutions make sound loans.Did anyone see Greenspan doing that during the boom years? Didn't you all hear him testify that the fed was not set up to "bust commodity bubbles" ? Well, Alan, how about just ensuring that those interest-only loans that you were endorsing were used as they were intended? Greenspan is practically the sole cause of the RE mess. Trying to pin the blame on a free RE market (that doesn't even really exist) is Whelan's method of whitewashing a fellow economist. Sorry, Whelan, you can invent facts and history all you want, but we all know who caused the mess, even if you're too cowardly and unethical to admit it.
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crankyoldperson - Monday, October 27, 2008, 2:34PM ET Report Abuse
* Overall: 1/5
In a free market, insurers set rules for those they insure. To do otherwise risks financial ruin. Classic example. The fire insurance industry, not the government, has helped vastly improve fire safety. Only the government insures without regulating, because only the government gets bigger and stronger the more it screws up. The current financial mess is NOT a failure of the free market. It, like the Great Depression, is a consequence of the government's attempt to create a financial utopia.
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Yahoo! Finance User - Monday, October 27, 2008, 2:31PM ET Report Abuse
* Overall: 5/5
The article and accompanying comments nicely summarize why the trust in the free market is essentially a religious belief. I have traveled in many countries where there really is an unfettered market, with little governmental interference. They are all very poor, third world countries.
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rodger.darr - Monday, October 27, 2008, 2:31PM ET Report Abuse
* Overall: 3/5
Rodger Darr says - I read a very disturbing news headline last week on Yahoo Finance. It stated, "Stocks Rise on Hopes of Credit Recovery." Shouldn't stocks rise on hopes of PROFIT recovery, VALUE recovery, EARNINGS recovery, or any other thing associated with making more real money instead of getting more credit? Kind of makes one think the depths to which things have gotten and how much further they are likely to go south WHEN THE CREDIT MONSTER UNDE THE BED - THE SECOND WAVE OF MORTGAGE DEFAULTS (Alt-A, Option Adjustible Rate, Jumbo Prime) HITS IN 2010. Yeah, that second phase of meltdown no one talks about.
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Yahoo! Finance User - Monday, October 27, 2008, 2:30PM ET Report Abuse
* Overall: 1/5
Whelan and his moronic me-too chorus on this message board are the type of boobs who shout loudest for government to "do something", all the while blissfully unaware that government intervention caused this mess in the first place, and will actually make it much worse. Once they're finished demolishing the currency in this ludicrous "bailout" effort, you can be sure Whelan and his sheep will be begging for more intervention. Unreal.
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markhagerman - Monday, October 27, 2008, 2:26PM ET Report Abuse
* Overall: 1/5
Ivory-tower nonsense. This situation was caused by government interference in the marketplace. We need a gold-backed currency, and an end to taxation.
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pbergn - Monday, October 27, 2008, 2:25PM ET Report Abuse
* Overall: 1/5
Is this guy even serious? A Harvard grad or something? OMG!!!!!!! This country is really going down if such rhetoric is even conceivable in this day and age... What a shame!! Mind boggling even to begin to comprehend!! Boo to this article (x 1000000000000000000000000) !!!!! [.. and yeah, he forgot to add that the "labor camps" is the ticket, and all the "greedy capitalists" and "fat cats", and "rich people" and everyone in between need to be disciplined by a firing squad... Way to go, Charles!!! Well done!!!! Your forefathers will be really proud of you!!!]
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sincodemiyo - Monday, October 27, 2008, 2:25PM ET Report Abuse
* Overall: 1/5
Seems you forgot about the regulation to lend to "poor" people and the mark to market requirement to name just two. Communism has been tested completely and failed. A true free market has never been tested therefore how can you say it has failed? (answer: you can't)
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Yahoo! Finance User - Monday, October 27, 2008, 2:23PM ET Report Abuse
* Overall: 5/5
Hi Prof. Wheelan: Thanks for a very accurate assesment. I guess what really let us down was the laissez-fare and crony capitalism which was being practiced since the last 8 years. In that aspect, this crash is a welcome one; this will ensure a little more shift to the center in terms of economic policies. I am amused by the nay-sayers to your comments - other than knee-jerk ad-hominem insults, they have little to offer.
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Paul - Monday, October 27, 2008, 2:23PM ET Report Abuse
* Overall: 5/5
Thank God for the death of faith-based economics. One can only hope the concept is never resurrected. This is the most accurate, honest perspective on the failings of the deregulated, greed-based economy I've seen yet. I hope we have learned our lesson.
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Yahoo! Finance User - Monday, October 27, 2008, 2:23PM ET Report Abuse
* Overall: 1/5
The federal government provides subsidies and incentives for individuals to buy homes using borrowed money. Don't you think that had anything to do with the real estate bubble?
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muc diner - Monday, October 27, 2008, 2:22PM ET Report Abuse
* Overall: 5/5
A thoughtful article that highlights the weaknesses of the free-market philosophy and 'trickle down' populism. We may never know exactly if the philosophy or its execution failed the U.S. and the world. Fact is, the article reflects today's sentiment in most parts of the world, and many governments are in the process of implementing regulations that will avoid the risks that caused the current crises. By the way, effective regulation is a far cry from socialism, which allows only limited personal property. Effective regulation and shareholder protection will not disown us. Instead, it will reduce the disastrous impact of corruption, greed, and incompetence.
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magenta_tapir - Monday, October 27, 2008, 2:21PM ET Report Abuse
* Overall: 5/5
You're a big improvement over Ben Stein! The comments on this piece astonish me; I guess it just goes to show how we've gone almost 30 years and hardly ever heard a peep from anybody who didn't believe the "free market" religion. Just the idea that the government should regulate nuclear power plants or weapons of mass destruction seems to offend the sensibility of millions of US citizens. I'll guess they'll be voting for McCain.
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Bryan C - Monday, October 27, 2008, 2:21PM ET Report Abuse
* Overall: 1/5
Wrong wrong and wrong. America is still the greatest country in the world, and free-market capitalism will thrive.
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Yahoo! Finance User - Monday, October 27, 2008, 2:19PM ET Report Abuse
* Overall: 5/5
Very accurate and appropriate. The borrow-and-spend philosophy started by Reagan put us in a world of hurt by 1990. Clinton reversed that trend with some responsible fiscal leadership, turning our deficit into a surplus, only to have w put us back in severe deficit mode, with multiple recessions along the way, while we mortgage our country to China in exchange for stable interest rates. No wonder monetary policy doesn't work anymore. Meanwhile on the campaign trail we're supposed to feel sorry for some fake plumber who doesn't want to pay his taxes and lies about wanting to buy a business, claiming that he can't because he's going to pay 4% more taxes on his income after deductions above $250K, while nobody says a thing about a working professional with kids he will not send to college and who's house will get foreclosed because his insurance company doesn't want to cover a disorder that could kill one of his kids and he can't let that happen, even if he loses everything to keep her alive. Only in America folks, do people have to make that choice. You call it socialism and demonize it, but the rest of the world is beginning to demonize us for this backwards thinking. The rest of the world can accept the role of a well-run government in a representative democracy, it works for the rest of the developed world, just not here. I'm tired of no-government zealots that have run this nation to the brink of losing its stature permanently.
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cowboy47201 - Monday, October 27, 2008, 2:17PM ET Report Abuse
* Overall: 4/5
Couple of things. First are the either/or posters who see the world in black or white. Forget it, you will never grasp the economic system we live in. It has never been "free markets" since we left the simple bartering of ages ago. Get over the idea that we are losing it. Secondly, in this world of economic complexity, we seem to have a lot of people who like to game the system. They have always been around trying to figure how to move money, take a cut, and move it again. It is totally non-value added to the health and well being of the population at large. The more complex the more opportunities, so do not look for this to go away for very long. And finally, all the "smart" people bashing this, why did you not see this coming, get out, and take you money and run for office. And we know why, you are fringe characters who like to rant and would not be taken seriously by anyone except the other fringe folks. You know, all this anger is not good for your body, and believe it or not, no one cares what you think, or what I think for that matter. let it be, move on, take care of yourself, quit screaming at the world to let you be in control. Not going to happen.
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ACE - Monday, October 27, 2008, 2:17PM ET Report Abuse
* Overall: 1/5
Spoken like a good little Marxist Dr. Wheelan. Are you a part of BHO's campaign? If given the chance, the markets always correct themselves. Government regulations and price fixing will be the death of us all. If you are looking for someone to blame for this economic crisis, take a look at who forced the lenders to make bad loans. Yes, there are those who starting living beyond their means but they never should have been approved for the loans in the first place! You are a socialistic moron sir. Why don't you move to France? Your advice would be welcomed there, not here.
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