* NY Times: The Free Market: A False Idol After All? *


Richard Moore

³Untethered market forces lead to bad things,² said Mr.
Bernstein of the Economic Policy Institute. ³You simply
can¹t run an economy as complicated as ours on ideology

Original source URL:

December 30, 2007
The Free Market: A False Idol After All?

FOR more than a quarter-century, the dominant idea guiding economic policy in 
the United States and much of the globe has been that the market is unfailingly 
wise. So wise that the proper role for government is to steer clear and not mess
with the gusher of wealth that will flow, trickling down to the every level of 
society, if only the market is left to do its magic.

That notion has carried the day as industries have been unshackled from 
regulation, and as taxes have been rolled back, along with the oversight powers 
of government. Faith in markets has held sway as insurance companies have fended
off calls for more government-financed health care, and as banks have engineered
webs of finance that have turned houses from mere abodes into assets traded like
dot-com stocks.

But lately, a striking unease with market forces has entered the conversation. 
The world confronts problems of staggering complexity and consequence, from a 
shortage of credit following the mortgage meltdown, to the threat of global 
warming. Regulation ‹ nasty talk in some quarters, synonymous with pointy-headed
bureaucrats choking the market ‹ is suddenly being demanded from unexpected 

The Bush administration and the Federal Reserve have in recent weeks put aside 
laissez-faire rhetoric to wade into real estate, wielding new rules and deals 
they say are necessary to protect Americans from predatory bankers ‹ the same 
bankers who, only a year ago, were being lauded for creativity. Were the market 
left to its own devices, millions could lose their homes, the administration now

Central banks on both sides of the Atlantic are coordinating campaigns to flush 
cash through the global economy, lest frightened lenders hoard capital and 
suffocate growth. In Bali this month, world leaders gathered in the name of 
striking agreement to slow climate change.

Adam Smith used the metaphor of the invisible hand to describe how markets 
should function: With everyone at liberty to pursue self-interest, the market 
omnisciently distributes goods and capital to maximize the benefits for all. 
Since the Reagan administration, that idea has weighed in as a veritable holy 
commandment, with the economist Milton Friedman cast as Moses.

As the cold war ended and Communism retreated, the invisible hand seemed to 
monopolize economic thinking. Even China, controlled by a nominally Communist 
party, has blessed private entrepreneurs and foreign investment. In Latin 
America, the International Monetary Fund financed governments that embraced 
market forces while shunning those that were resistant.

But now the invisible hand is being asked to account for what it has wrought. In
this country, many economic complaints ‹ from the widening gap between rich and 
poor to the expense of higher education ‹ are being dusted for its fingerprints.

After two decades of disappointing economic growth, several Latin American 
countries have spurned the I.M.F. while embracing the finance and thinking of 
Venezuela¹s avowedly Socialist leader, Hugo Chávez. China¹s leaders, though 
still devoted to ³reform and opening,² are keeping tight control on the value of
the currency while steering capital to powerful state-owned companies, concerned
that freer markets could throw millions of peasants out of work.

Throughout history, regulation has tended to gain favor on the heels of free 
enterprise run amok. The monopolistic excesses of the Robber Barons led to 
antitrust laws. Not by accident did strict new accounting rules follow the 
unmasking of fraud at Enron and WorldCom. Now, the subprime fiasco and a still 
unfolding wave of home foreclosures are prompting many to call for new rules.

³We¹re revisiting the question of market flows with a deservedly wary eye,² said
Jared Bernstein, senior economist at the liberal Economic Policy Institute in 
Washington. ³For decades, economists and political elites have argued that any 
time you regulate any aspect of the economy, you¹re slipping the handcuffs on 
the invisible hand. That¹s demonstrably wrong in lots of ways.²

But if markets can inflict pain, the harm from trying to tame them is often 
worse, argue those who would let the invisible hand carry on. The new regulatory
tilt threatens to tie up innovation in a straitjacket of bureaucratic nannying 
while slowing the global economy, they say.

³Every regulation reduces people¹s freedom,² said David R. Henderson, a 
libertarian economist at Stanford University¹s Hoover Institution. ³The more 
regulation we get, the worse we do.²

Mr. Henderson is critical of the Bush administration¹s effort to freeze mortgage
rates, and the new rules proposed by the Fed intended to curb nefarious lending.
They undermine the sanctity of contracts, he said, while making mortgages harder
to gain for everyone.

³The way they justify it is that you¹ve got to protect the stupid people who 
can¹t read a contract,² Mr. Henderson said. ³But they¹re treating everyone as 

But in Washington, and under the roofs of many homes now worth less than a year 
ago, there appears to be a shift in the nation¹s often-ambivalent attitude about

Back in the boom, banks made loans to homeowners who did not have to prove their
ability to pay, then quickly sold the loans to other companies. By the time it 
emerged that a lot of homeowners could not pay, these loans had been pooled with
other loans and chopped into strange new paper assets that were sold to 
unsuspecting buyers around the globe. The subsequent reckoning has forced major 
banks to write off vast sums of money.

³Here you had all these people who were supposed to be sophisticated investors, 
and it turns out they were buying billions of dollars worth of debt where they 
didn¹t even understand what they owned,² said Dean Baker, co-director of the 
liberal Center for Economic and Policy Research. ³There is going to be a 
willingness to re-regulate financial markets.²

Liberal critics have long asserted that dogmatic devotion to market forces has 
skewed American society toward those of greatest means. More wealth is being 
concentrated in fewer hands, with rich people capturing the best housing, 
private education and health care services, and, as the argument goes, only 
crumbs left for everyone else.

That critique informs proposals from Democrats vying for the presidency, as they
debate how best to expand access to health care and ways to shift the tax burden
to the rich. They are in essence calling for market intervention to redress 
imbalances. With the gap between the richest and poorest now greater than it has
been since the 1920s, these pitches have emerged as central components of their 

More notable, though, is how fervent proponents of unfettered market forces have
lately come to embrace regulation.

The Bush administration, in seeking to freeze mortgage rates for some 
homeowners, put Treasury Secretary Henry Paulson Jr. in charge of the campaign. 
Mr. Paulson not long ago ran the Wall Street giant Goldman Sachs. Now, he is 
demanding that banks accept smaller payments than promised, while describing the
market as a fallible thing in need of supervision.

³The government acted to prevent a market failure and to try to avoid 
unnecessary harm,² he said at a public meeting in California.

More than a decade ago, when Bill Clinton occupied the White House, he pushed 
through the landmark North American Free Trade Agreement, which linked the 
fortunes of Mexico and the United States. But if his wife or one of her 
Democratic rivals captures the White House next year, they promise a more 
skeptical look at trade deals.

Some argue that the push back against market forces is a momentary pause in a 
steady march toward unfettered capitalism. The libertarian Cato Institute 
recently issued a report in which it found that economic freedom ‹ shorthand for
smaller government and fewer regulations ‹ has never been greater.

³Global economic growth significantly increases with the growth of the world¹s 
economic freedom,² said Ian Vásquez, director of Cato¹s center for global 
liberty and prosperity.

Few policymakers have a beef with that characterization as a generality. But 
when things go wrong, demands grow for the government to step in and make them 

³Untethered market forces lead to bad things,² said Mr. Bernstein of the 
Economic Policy Institute. ³You simply can¹t run an economy as complicated as 
ours on ideology alone.²

Copyright 2007 The New York Times Company

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