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In Defense of Markets
Editorial of The New York Sun | September 16, 2008
In Defense of Markets - September 16, 2008 - The New York Sun

As the crisis on Wall Street tempts the politicians, someone needs to put in a word for free markets. Senator Obama is rushing to blame the Bush administration and New Yorkers and calls for more regulation. "The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren't minding the store," Mr. Obama said in a statement yesterday.

He added: "Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression."

One might think the Democrat would be answered by the Republican presidential candidate. But Senator McCain is reacting to this opportunity by warning that American workers are being threatened by "the greed and corruption that some engaged in on Wall Street." Added Mr. McCain: "From Washington to Wall Street, the top of our economy is broken. We've seen self-interest, greed, irresponsibility, and corruption undermine these hardworking American people. We're going to put an end to the abuses in Washington and on Wall Street that have resulted in a crisis that we are seeing unfold today."

The Republican went on: "Enough is enough. Enough is enough. We're going to reform the way that Wall Street does business and put an end to the greed that has driven our markets into chaos. We'll stop multimillion-dollar payouts to CEOs that have broken the public trust. And we'll put an end, as I said, to running Wall Street like a casino. We'll make businesses work for the benefit of their shareholders and their employees, and we'll make sure that your savings, IRAs, 401k and pensions are protected." The McCain campaign yesterday released a television commercial promising "tougher rules on Wall Street."

The top Democrat in the Senate, Harold Reid, offered his own assessment: "What we are seeing on Wall Street is the legacy of the Bush-McCain economic policies that have failed this nation. Failing to police lenders and neglecting to protect consumers ushered in the sub-prime crisis that has brought the American economy and Wall Street to their knees." Mr. Reid insisted that "America needs another economic recovery package," and he encouraged Mr. McCain "and other Bush Republicans in Congress to work with Democrats to pass a second economic recovery bill."

Meanwhile, the Republican administration's Treasury secretary, Henry Paulson, a former chief executive of Goldman Sachs, appeared at the White House to announce that in his view, "the root of the problem lies in this housing correction." He said he was "making sure we have plenty of finance in housing," and said, "there is a risk-able chance that the biggest part of this housing correction can be behind us in a number of months."

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Well, let us just say that there is a risk-able chance that none of these politicians has it right. If not even our leading Republican politicians are going to speak up for markets at this juncture, allow us the opportunity. America got into the subprime housing crisis not only because of errors in the business community but because our governmental authorities sought to encourage greater diversity in lending, because the Congress and our monetary authorities failed to protect the value of the dollar, and because all too few in our political leadership respected the market in the first place.

To where has wisdom fled Washington? Senator Obama's claim that the problem is the policies of the Bush administration doesn't stand the test of reason. The Bush administration was in office and its policies were in effect in 2003, 2004, 2005, and 2006, when the American economy, the housing market, and the stock market were doing pretty well.

Senator McCain's claim that the problem is "greed and self-interest"? Both are necessary ingredients to a capitalist economy and elements of the human condition. It's hard to believe that Wall Street bankers were any greedier or more self-interested in the past year or two than they were in the 1980s or the 1990s. As for "corruption," while federal criminal charges have been filed against two Bear Stearns managers, it would be a catastrophic mistake, as a general matter, to criminalize risk-taking that did not work out as planned.

Mr. McCain's promise to "stop multimillion-dollar payouts to CEOs that have broken the public trust" came after the government announced it would not pay the outgoing executives of Fannie Mae and Freddie Mac the money they are owed. That news did not prevent a 500-point drop in the Dow Jones Industrial Average. And it has been the market, not any government regulations, that has devastated the net worth of CEOs whose judgment proved unprofitable.

Secretary Paulson's claim that the problem is housing prices and that the solution lies in easy money for mortgages? While the Case-Schiller index of national housing prices is down nearly 20% from its 2006 peak, it is up about 42% from the beginning of the Bush administration. Didn't easy mortgages for overpriced properties contribute to the current problems we do have? What is Mr. Paulson doing offering more of the same as a solution, and what is the logic of making taxpayers the lender? Mr. Reid's recipe of "another economic recovery package"? The first one doesn't seem to have been a panacea. Chances are that what Congress calls an "economic recovery package" would amount to borrowing more money from China to pay for American government spending that American taxpayers would eventually have to pay back.

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The biographer of John Maynard Keynes, Lord Skidelsky, writing in the adjacent columns, reckons the current crisis will mark the end of an era, in which the conservative cycle that some of us call the Age of Reagan and the Age of Thatcher will give way to a new cycle of liberalism. He cites what he calls "cycles of economic fashion" that he reckons are "as old as business cycles." But a headline on The New York Sun — "Wall Street Weathers Worst Drop Since September 11" — put us in mind yesterday of the astounding resilience of the American economy. If only the enduring laws of economics and markets are allowed to work.

The years after 2001 brought an unprecedented boom to Wall Street, New York City, and much of the rest of America. Notwithstanding the costs of a war and a historic hurricane named Katrina, vast wealth was created and widely dispersed. The introduction of Apple's ipod, the public offerings of Google and of the Blackstone Group, the building boom in New York City, the opening of Time Warner Center — all these happened after the September 11 attacks.

Despite yesterday's stock market downturn, the bankruptcy of Lehman Brothers, and the disappearance of Bear Stearns and Merrill Lynch as independent financial houses, positive economic signs are to be seen. The dollar has been strengthening, oil prices have been weakening, and American employment and growth are stronger than those of Europe. Even after yesterday's fall, the Dow Jones Index of U.S. financial stocks is actually up about 10% from its mid-July low. Mr. McCain was mocked by the Democrats, but he was actually right when he said the fundamentals of the American economy are strong. They will need to be to withstand the efforts of the current crop of politicians.

Why is "outsized bonuses for CEO's" ever an issue? Why does the amount of money a businessman make anyone's business other than the stockholders? Why is it football players, actors and teleprompter reading news anchors outrageous salaries never discussed?

Inquiring mind want to know.

__________________
Its better to have fussed and crabbed then never to have fussed at all - Lucy

Athletes aren't driving the economy.

mine are looking great. 14 of 44 still up from the prior monday, and the total sum is only down .92%. time for you to change stratagies ole timer.

now im only down .32% from the prior monday. things couldnt look any better for me. unless i had not diversified. then id be up even more. thats what diversification does sometimes. it sinks yer boat. im surprised Mulp aint singing praises about his CHG.

>>>Gimme a break with that nonsense. Bush's only mistake is that he mis-timed the meltdown. He really wanted to loot the economy and be out of office at about the same time the Dems took over.

my " basket " of stocks has gone UP by 2.86% since the week ago monday. " the sky is falling! the sky is falling! " chicken little.

I guess you think planting fiscal IEDs that will detonate in three to five years is something to be rewarded.

You must love the work of al qaeda in Iraq, of the Saddamists, and the Taliban.

In both cases, the grunts planting the IEDs and the financial IEDs were paid on completion of their placement, and got paid nothing if they refused based on some moral principle like it being wrong to profit from harming others.

And the top level people directing the efforts were rewarded with power, with profit from the illicit and illegal trade that the exuberance concealed, and with a sense of arrogance at being smarter than everyone else.

Of course, the really smart players, the hedgefund managers who were cleverly position to profit on both sides of the debacle, like the Pakistani ISI-military alliance that in playing both sides is able to promote attacks on American forces and allies while collecting cash from the US government.

The key to both ventures is to make sure that the government rules make it easy to keep the real state of affairs and the real flows of information secret from the people who end up stuck with the real risks.

A handful of people figured out that things were really dangerous and that it wasn't possible to trust much of anyone.

Obama pointed out that there were serious problems ahead back in March 2007. But he was merely listening to other smarter people who had first hand experience in such matters. Like Warren Buffett, who interestingly is in the insurance business. This is what Buffett said more than five years ago:
Look back at the CEOs of the very financial companies going under today, and you will see that they got huge bonuses for going all in with your capital if you have it invested in stocks and bonds on Wall Street by selling deals that would explode years after they were gone. The CEOs of all those companies were ousted, with their bonuses and golden parachutes paid, about two years ago because as the house of cards could be built up some more to create the appearance of growth and profit. Now the replacement CEOs are seeing these houses of cards collapse.

But hey, taking risk with your assets and making profit from putting you in even greater riskier investments, without you knowing it, by the way, is the beauty of a free market run by greedy capitalists who can keep secret the risks they are laying on others.

And to think that people think Ponzi schemes should be be illegal. Ponzi schemes can be very profitable if everyone just believes in the free market.

Pssst, I can make you a millionaire if you send me $20, and then pass this on to ten of your friends who will send me $15 and send you $5, and then get ten of their friends to send me $10, send $5 to you, and $5 to their friend. It might look like I'm getting paid a lot for very little work, but trust my genious, and look at how much you are going to get for your $20 investment. This is all based on trusting the free market which always works, and thus must always reward me a lot of money because I understand the free market and trust.

>>>How many $$$trillions have been lost just in the last day and a half? Market down 500 yesterday, 350 so far today.

Because it reflects a horrible lack of priorities on the parts of these companies.

if you think about it, the only reason CEO salaries are so high, is nto because they do something magical that deserves them, but because it looks good to shareholders that the company can afford such an expensive individual, and it reflects their confidence in him. If they were to pay a CEO half what another industry leader payed, shareholders would wonder what his credentials were and lose confidence.

It's a sad little shell game.