A Defense of Free Markets

This has been submitted to the Forest Grove News Times as a column to be published during the week of 29-Sep-2008.

I provide it here as I submitted it, with a link to the published version. (This will be put online only after the News Times comes out, so they'll have first use of the material.)

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Your true friends are those people who -- when you're suddenly unpopular -- still stand by you. I'm a long time friend of the Free Market, and I'm willing to rise now publicly to defend my friend, and to set the record a little straighter. The Free Market is being blamed for all that is wrong with America's financial institutions. Alas, a lot of the criticism is off-base, self-serving, or flat wrong.

Free markets are the ones that exclude force and fraud, and rely on purely voluntary exchanges. Every honest exchange between a willing buyer and a willing seller is a free market transaction. When you hire your neighbor's kid to mow the lawn or babysit, the two of you are engaging in a free market transaction. When they function well, free markets channel greed into acceptable forms that bring about social good. Those who take on risk get to keep any rewards and must shoulder their losses.

Free markets are the result of -- are the sum of -- all these voluntary transactions. But greed itself is not good. Greed unrestrained by law, greed unchannelled, can lead to crimes like fraud and coercion.

Fraud is a crime. When an Enron or Worldcom or Fannie Mae lies and commits fraud, that's not "Darwinian capitalism" -- it's a crime and an attack on the market. That's why it's wrong to say that government is at odds with the market -- in reality government's police powers (and private anti-fraud measures) are what enable markets to exist and function.

Fraud is not only the enemy of free markets -- it's the enemy of good government as well.

Not every market is free. Prisons are rife with black markets, characterized by both fraud and violence. Black market drugs contain dodgy and ofttimes poisonous ingredients; black market disputes are settled with fists, knives and guns. The black market for sex -- prostitution -- is a litany of abuse, disease, violence and misery.

Government plays a vital role in keeping free markets free -- through courts, cops, regulations and transparency rules. Unfortunately, government agencies can sometimes be seduced into acts that don't protect but rather distort markets, harming the many to benefit the few.

These seductions include, for example, a government using taxpayer money to fund a pressure group to coerce banks into lending money to borrowers who can't afford to repay the loans. Then either the bank or the taxpayer takes the loss when the borrowers default. Such lending under pressure may be understandable, but it's not a free market transaction -- remember the ban on force and fraud -- and occurs because the government has abandoned its proper role as guardian of the rule of law.

Such is the case today. Since 1995 the Community Reinvestment Act (CRA) has been used -- along with lawsuits by left-wing pressure groups -- to force banks to lend to low-income, high-risk borrowers. Any bank that resisted was subject to huge fines. That's coercion. If any private person had tried to do this, he'd have been arrested.

To answer concerns by banks that these loans were too risky, the government-sponsored entity called Fannie Mae offered to buy up all riskier loans. By 2007, Fannie Mae and CRA had resulted in an extra $1 Trillion of home loans to people who couldn't pay them back.

Fannie Mae then -- with government approval -- created "securitized" bundles of loans and sold them off to everyone under the sun. Today we're told that nobody, even the creators of these derivatives, really understands them. Selling something you don't understand, and guaranteeing something without the means to guarantee it, are both fraud. Yet the heavily regulated, government-sponsored Fannie Mae did exactly that.

Today the same people who created CRA and were supposed to oversee Fannie Mae -- our US Congress -- are telling us that the financial market's woes are caused by "the market" and by a "lack of regulation". The facts say otherwise.

It's understandable why the architects of today's disaster want to distract public attention from their role. Maybe some of them even believe it. We should not buy it.

The public should look closely at the root causes of the disaster and agree on a fix that makes things better, not worse. The root causes involve massive government meddling in the markets and rampant dishonesty. The cure being proposed involves even more government meddling in the markets and is being sold through dishonesty. The public should demand an independent investigation of Congress' role in creating the current financial disaster.

And those who took on risk with the expectation of keeping any rewards, must shoulder their own losses and not be bailed out by taxpayers.