The End of the Free Market?

Now, more than ever, the public is taking a second look at America’s financial system. The recent collapse of many financial institutions has ordinary people asking, “Where did we go wrong? Who went wrong?” Situations like these seem to generate much discussion. Unfortunately, it also seems to precipitate a lot of rhetoric as people on both ends of the spectrum make the other side out to be the scapegoat.

Both political parties unquestionably played some role in getting us here. One thing is true-the era of Alan Greenspan and the indestructible free market seems to have come to an abrupt end. That seemingly unbreakable economy has to face reality like a partier waking to a rude hangover. There are many factors that created this economic atmosphere that enabled the financial crisis to take place. Two major factors will be discussed. First off-deregulation. Many people desire for the government to play a limited role when it comes to policing our economy. That desire may be well justified. However, what happens when capitalism is left unchecked? What happens when executives are left to their own vices? The current economic crisis has even many of staunch proponents of the free market rethinking their views on the relationship between the government and economy.

Also, the times have changed. The “laissez faire” approach has worked in many instances, but the globalization of economies seems to have changed many rules that we once adhered to. Long ago, economies were much more localized. Now, large corporations wield more power than ever.

On the other side of the spectrum, many sought to make loans evermore obtainable. This was accomplished by the persistent lowering of interest rates by the Federal Reserve. This is a tool utilized by the Fed to fight unemployment. The problem is that this comes at the price of inflation, because the money supply is increased. As the Obama administration makes drastic measures to attenuate unemployment and “restart spending”, the issue of inflation is sometimes overlooked.

Furthermore, the lowering of interest rates that the US experienced prior to much of the financial meltdown encouraged irresponsible lending and borrowing by both the banks and private entities. This is similar to the stagflation that the US saw in the 1970s. People finally woke up and realized that they need another interest rate cut like they need a proctologist with a benign tremor. This increase in liquidity from banks also characterized the economic environment prior to the Great Depression. In layman’s terms, money was too easy to borrow. Investors were buying more stock than they had in cash, supplementing the difference with a loan from their brokers. The credit-driven economy was unsustainable.

Yet another debate is going on. Who is to blame? Is it Wall Street or Washington? One could not pursue that question without first answering questions concerning his/her own views of the function of these institutions. However, the first step is to simply begin this discussion. Wall Street has certainly played a part.

Executives have not prioritized the best interest of the public. When they make a lot of money at a very fast rate, there is little incentive to make decisions that consider the long run. Policies of easing up on regulation under the Bush Administration were stepping stones that allowed financial institutions to provide underhanded loans to unsuspecting investors-loans that could never be repaid. Why were these institutions allowed to run free in the first place? Alan Greenspan himself has expressed remorse for the faith that he put in the free market. One thing is certain-one could expect those in government to take a long hard look at how free the free market should be.

Nonetheless, for the civil Libertarian who is always thinking in rational terms of sustainability, the blame will eventually fall on the individual. It is the individual who makes up these institutions. A group of individuals sought to keep interest rates low as possible, which compounded the problem by promoting irresponsible lending and subsequent inflation. This made it easier for private individuals, most of who were already in debt, to borrow more money. This was allowed by another group of individuals (the Federal Reserve) who were more than happy to help “restart spending”. After all, the private banks that make up the Fed stood to profit from it. Another group of elected individuals looked the other way, as their friends on Wall Street were left unregulated. Those individuals on Wall Street took full advantage of the free-for-all.

The country now faces a major challenge of not only tracking through a deep valley of economic downturn, but also climbing a mountain towards long-term sustainability. Decisions made by this generation’s college students will determine much of the outcome. Of course, Americans, like all others, can expect the economy to fluctuate from time to time. But in order to avoid such a collapse in the future, major restructuring of the government’s role in the financial system will likely take place.