The Myth of Free Markets: Even Greenspan Sees the Light
by David Model, Tue Oct 28, 2008 at 06:26:16 AM EDT
Not unexpectedly, it required a major disaster to awaken former Federal Chairman, Alan Greenspan, to the long overdue reality that the free-market, free enterprise economic model fails to trickle down wealth to the poor and near poor but concentrates wealth at the top.
The free market model or Neoliberalism was developed by Friedrich Hayek and Milton Friedman at the Chicago School of Economics Chicago where it became an axiom that the private sector was the key to long-term economic stability. Neoliberalism has gradually become the prevailing economic conventional wisdom in the United States and has been foisted on most countries through pressure from the United States or through the IMF and World Bank, America's secret instrument of exploitation.
Simply stated, free-markets, a system with as little government interference as possible in the operation of market mechanisms, have been allowed to operate with increasing privatization and deregulation and a minimum of government transfers. In theory, when free-market economics operates at peak efficiency, the so-called fabled "invisible hand", coined by Adam Smith, was empowered to distribute wealth to all deserving citizens. The theory of the "invisible hand" must be one of the most distorted ideas in the history of economics. Adam Smith did not mean nor imply that people should be deserted by the government to fend for themselves but rather that all peoples' needs must be met.
The deregulation of the banking system and the privatization of the Federal Reserve in 1913 are at the root of the current financial crisis and have paved the way for unfettered greed to trigger the virtual collapse of that system. The collapse spells the end of any credibility for the notion that by investing wealth at the top it will automatically reach the bottom.
Managing the money supply, interest rates, and exchange rates, or the monetary system, is a vital function in the economy and should serve the public interest in a democratic society. Since it is privately owned, the Federal Reserve is almost entirely independent of the government consisting of twelve regional Federal Reserve Banks located in major U.S. cities in twelve regions and organized in a similar fashion to private banks whose shareholders consist of private banks in each district.
As well, funding for the Federal Reserve System is independent of the government and depends on interest earnings on its portfolio of investments. Its decisions do not need to be ratified by either the president or Congress.
Instead of protecting consumers in recent years, the Federal Reserve has adopted policies that have supported large financial institutions in their frenzied, greedy pursuit of wealth ultimately pulling the rug out from under the economy. While deregulated financial institutions were offering mortgages at initially low interest rates to high risk borrowers, the Federal Reserve was expanding the money supply and lowering interest rates to facilitate this feeding frenzy. Eager homebuyers flocked to their nearest bank to borrow money at the ostensibly bargain basement interest rates and without the need to meet stiff credit requirements. Mortgage-debt in 2000 was $4.8 trillion while in 2006 it rose to $9.3 trillion. When borrowers began defaulting on their mortgages, banks that had used the mortgages as collateral to borrow for investments in other risky instruments were suddenly unable to meet their obligations. The downward spiral into total collapse was well underway.
If the Federal Reserve had been a public institution, it might have implemented a different set of policies to avert the disastrous bubble that has now burst.
Another way in which the Federal Reserve has become complicit in the financial crisis is through its non-interventionist approach to the proliferation of very risky financial instruments known as derivatives. With risky mortgages backing further risky, highly-leveraged investment in derivatives, the calamitous outcome was inevitable.
In addition, deregulating the financial system created the conditions which engendered the financial crisis by transforming commercial banks, whose primary purpose was to serve as a safe place for consumers to deposit their money, into investment institutions where risk-taking for profits was the central objective. Now, consumers hard-earned money was now being deposited into apparently safe institutions when, in fact, it had indirectly become the source of funds for greedy investors who were willing to take risks to earn large profits.
Regulation of the banking system was solidified in the Glass-Steagall Act of 1933 which prohibited a commercial bank from owning speculative financial institutions. It imposed restrictions on the integration of banking, insurance and stock-trading companies to protect the consumer from losing their money through risky investments.
Since the 1980s, the banking and investment sector has been pressuring Congress to repeal the Glass-Steagall Act to afford them the opportunity to increase their profits by using depositor's money to back risky investments. Their efforts succeeded when Congress passed the Gramm-Leach-Bliley Act in 1999 which repealed Glass-Steagall and allowed commercial bankers to underwrite and trade instruments of a highly risky nature. It also lifted most restraints on the monopolization of the institutions in the financial sector of the economy.
To compound the problem of deregulating banks, Congress passed an amendment to an appropriations bill which deregulated derivatives. Derivatives are an extremely risky investment which is highly leveraged. Banks would now be free through their investment arm to risk depositors' money in an investment that should be reserved for those who want to gamble large profits at the risk of large losses.
By deregulating the banking system, freeing derivatives from regulation, and creating a privately owned Federal Reserve System paved the way for the financial crisis which is not only destabilizing the American financial system but the global one as well. Deregulation and privatization are two of the main pillars in the free market economic system and their failure is proof that the non-wealthy members of society are adversely affected. In this case, it is clear that privatization and deregulation were not intended to benefit the non-oligarchical members of society but to create opportunities for large accumulations of wealth. The only hope of ending the financial crisis and avoiding another one is to reform the system to protect all the people.
State of Darkness: US Genocides since 1945.