The Free Market as Regulator
posted by Josiah Garber on September 9, 2009
in Economics, Politics
by Ron Paul
Since the bailouts last fall, lawmakers have been behaving as quasi-owners of the bailed-out banks and businesses, leading to calls for increased regulation of executive compensation and other wasteful expenditures. We have heard much about bonuses and executive pay packages that sound more like lottery winnings than an honest salary.
Many lawmakers voted in favor of these unconstitutional bailouts, believing that these corporations were too big to fail, and allowing them to go under would precipitate widespread economic disaster. This second wave of citizen outrage at the bailouts has left these lawmakers with a bit of egg on their face, and once again, they feel the need to “do something” to “fix” it. Shouldn’t there be a regulatory structure in place governing executive compensation? Politically, it seems quite feasible. People are outraged that the system has once again gutted the many to make a few at the top fantastically wealthy. But they are incorrectly demonizing the free market.
What we need to realize is that there WAS a regulatory structure in place that was attempting to stop bad management, including overpaying executives. That regulatory structure is the free market, and when poor management brought these companies to the point of bankruptcy, Congress circumvented the wisdom of the free market, and inserted its own judgment at our expense. And now because of that intervention, we will be burdened with massive new regulations. We can be certain this effort will fail.
The free market is a naturally occurring phenomenon that can’t be eliminated by governments, not even totalitarian ones like the former Soviet Union. It can be regulated, over-taxed and manipulated until it is driven underground. Lately it has been wrongly accused of doing so many things it just doesn’t do, that are really the fault of crony corporatism and convoluted government policies that brought on the crisis. Too many people equate the free market with big business doing whatever it wants, but that is not the free market. Unconstitutional taxpayer-funded bailouts are what allow giant corporations to run roughshod over the economy. The free market is what puts them out of business when they misbehave.
The free market is you and your neighbors working hard to produce what you produce, and exchanging goods and services voluntarily, in mutually agreeable arrangements. The free market is about respecting property rights and contracts. It is not about building up oligarchs and monopolies and confiscatory tax theft – these are creatures of government.
We must watch out when government comes up with interventionist solutions to interventionist problems. The root of our problems lies in interventionism. Trusting the free market is the solution.
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“Unconstitutional taxpayer-funded bailouts are what allow giant corporations to run roughshod over the economy. The free market is what puts them out of business when they misbehave.”
I know you are not Ron Paul… but i don’t agree with this statement at all. The giant wall street corporations were taking advantage of the american public long before the government bailed them out. The sub-prime mortgages, talking people into loans they could never afford, the executive bonuses… the misbehaving was happening under a so-called free market long before the government intervened. i attribute the problem more to a lack of intervention, and a capitalistic system that rewards greed and does not provide for any regulatory structures to prevent such abuse. I think the current private health care insurance system is another obvious example
I agree that wall street was taking advantage of the public before the bailouts as well.
However it is my belief that the bailouts and government intervention make things worse as far as taking advantage of people.
For example Fannie Mae and Freddie Mac were at the heart of housing bubble and collapse. These corporations were GSEs and it is hard to imagine the same problems without them.
Also the Community Reinvestment Act pushed lenders into making more risky loans, this unnecessary and while seemed to be motivated by good-will caused undue pain to many people.
Bailing out is not a problem only at the time it happens, We also have the moral hazard created by FDIC insurance and the unwritten agreement of bailouts. I find it hard to believe that banks would extend credit into such high risk areas without this implicit encouragement by the government.
Cheap money by the Federal Reserve Pumped into the system also takes advantage of the poor and encourages banks to make risky loans.
Lastly we have had increasing regulation, even through the Bush years, and markets have become more unstable. For example George Bush pushed the FHA to completely remove the down-payment requirement for many new homeowners. This was nothing new but simply and extension of policies that have been progressing for many years.
I understand why many people blame the problem on lack of government intervention, and I believe they are sincere, but I do not agree.
What I see happening with government and business is fascism: the merger of corporations and state.
Or in other words we socialize corporate losses and privatize corporate profits (for the coporations who are large enough to secure these interventions in government). This in my opinion is the worst of both worlds. If, as a rule, we did not interfere with bailouts and insurance I think the public as a whole would be much better off as no company would get special treatment.
I am not antiregulation, but if we are regulating inconsistently and in the wrong ways then regulation means nothing. We must remember that government is not God. All governments are run by humans and the same temptations exist for evil in government as in the free market. We should protect the rights of the individual not just the majority or those who have connections. We should protect the freedom of people to operate in the market. If we do this I think all people will be much better off.
Thanks for your comments, I always enjoy a little discussion.