In the last 6 years the free market was left pretty much alone. Regulation has become a dirty word. As everybody knows by now the economy is not in good shape. So, did our financial managers leave the economy alone? Of course not. Here's what they did:
Earlier this week, the Treasury Department organized an unprecedented rescue plan for America's largest banks. The banks, most notably Citigroup but also Bank of America and Wachovia, got into big trouble by sponsoring more than $400 billion worth of "off-balance-sheet" affiliates to do highly speculative deals with borrowed money.
These bank affiliates bought a lot of high-yield assets backed by subprime loans, credit card debt, used car loans, and other risky debt. Now it's not clear what these investments are worth.
Citigroup's affiliates have exposure totaling at least $80 billion. The Treasury persuaded several other banks to put up a huge pool of capital that will promise to buy securities that markets may not want, in order to keep market confidence (and bank balance sheets) from collapsing. In effect, the Treasury just added another layer to what may be a house of cards.
Yes, indeed, we need free markets. Free markets work wonders for little guys. If a little guy makes a bad investment, he loses his investment. So what? If a big guy like Citigroup makes a bad investment, it may affect everybody. We bail it out. As Kuttner puts it:
So, consider: If you lose your job to outsourcing or your pension plan to an engineered company bankruptcy or your health coverage to a corporate takeover or your home to a subprime loan shark, hey - that's the free market working and the free market makes America great. Tough break.
But if you are Citigroup, and you just squandered billions of depositors' money on speculative bets that went bad, the whole economy will tank if you fail and the government will rush to your rescue.
What do our leaders mean by "free market"? The market is free to smack its hidden hand against the vast majority of Americans, but the hidden hand is stayed by the powerful whenever the super-wealthy do atrocious financial deals. Isn't it time to "enhance" the market with regulation to stay the hand of corrupt financial organizations? Then we may all consider ourselves to be free.
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