Free Markets – free? markets? – lessons not learned

“Free market” has always struck me as a rather strange phrase. Never more so than in this period of financial market disasters. The phrase ‘free market’ continues to be used reflexively. Just as commentators go right on speaking of Wall St. as a source of capital and innovation, few want to ask out loud why we need most of  Wall St.’s “services”; few people are openly using the most obvious words to describe these services as gambling; and, we go right on using this phrase, “free market” to describe an economy that is not free and in many sectors not a market. A recent exception to this are the comments of Ben Friedman, a professor of economics at Harvard, who said, speaking on the PBS Newshour1  of the continuing high percentage of our “best and brightest” going to employment on Wall St., “…it’s all the more troubling when I think that, after they leave us, so many of them go into activities that are not economically productive for the country, for society, even, just narrowly, for the economy.”

This phrase “free markets” has layers of meaning both historically and in current usage. However, its use today by those in power in government, corporations, and the universities to cudgel people into submission is most distressing and destructive. There have been few moments in modern history where day-to-day life has delivered a clearer message than the lessons we should draw from the financial disasters of the last couple of years. We need to not allow people to use this phrase without persistently checking them with questions about the realities that we can all see, but they want to cover up or ignore by continuing to use the rhetoric of “free markets”.

These markets are not “free” in the sense of being open, accessible, transparent. Opaqueness and outright deception dominated throughout. Unbelievably, it appears that the current financial reform biull in Congress will not reign in the use and construction of all sorts financial chicanery like CDOs, Synthetic CDOs, and more. These are nothing but gambling with other people’s money and worse passing off the systemic risk to government and ultimately the US population.

These markets are not free in the sense of being free of government intrusion. Without government intrusion in the form of a global tsunami of government transfer payments, most of the major players and the financial markets themselves would have collapsed. Some “free”.

The “free market” as a system was again proved not to be self-correcting2 , perhaps not even self-sustaining. As a system “free markets” have been repeatably shown to be unstable, prone to enormous ballooning of leverage and prices followed by crashes. The current mess just demonstrates again for those who choose to ignore history what is well proven. One result of the current debacle is a publicly funded concentration of banking power that is likely only to make the risks of future bubbles and crashes (and we will have them) more catastrophic and difficult to survive. Just to get a sense of this concentration I went to the National Information Center of the Federal Reserve and looked up the size of the four largest banks today and found data for the end of 2009 and the end of 2005.

Total Assets ($trillion) 2009 2005 % change
Bank of America 2.223 1.294 +72
JP Morgan 2.032 1.199 +69
Citigroup 1.856 1.494 +24
Wells Fargo 1.244 0.482 +158





By the way, you might go to Wikipedia and see the entries for “free market”, “crony capitalism” and, for an introduction to some of the gambling services offered on Wall St., see these entries, “High Frequency Trading” , “Short Selling“,  “Collateralized Debt Obligation” , “Synthetic CDO“.

  1. http://www.pbs.org/newshour/bb/business/jan-june10/makingsense_06-04.html []
  2. unless one wished to conduct the ultimate “free market” test and just wait to see what happened. How far the whole mess may have unwound. []