Issue 110

Free markets need to be free of both bureaucrats and bankers

STONE the crows! Since when were crookedness and capitalism supposedly synonymous?

As far as the Crows can tell, pretty much since the Medicis got into the banking business.

Bankers, especially since the GFC, are as suspect as they were in the 15th century. And everybody who sees bankers as utterly incapable of honesty, unless supervised by the state, will take heart from Greg Smith’s New York Times opinion piece explaining why he left Goldman Sachs:

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets”I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.[i]

It’s the sort of statement that confirms the common community assumption since the GFC that only the state can save society from the rapacity of stock jobbing robber barons.

Kevin Rudd made the case back in 2009 when he wrote, “The international challenge for social democrats is to save capitalism from itself … to reconstitute properly regulated markets.” [ii]

Intentionally or nor, Rudd nailed it – the problem before and after the GFC is not markets but how to properly regulate them so they are not constrained by bureaucrats or plundered by thieves. To blame capitalism, and specifically the way financial spivs manipulate markets, is a sleight of hand, the equivalent of arguing if everybody was destitute there would be no burglary.

The GFC occurred because opportunists in banking and incompetents in government allowed markets to be manipulated.

Marian Wilkinson and Mary Ann Jolley made the point in their Four Corners program on the mess the previous Irish government created for the country by being “cheerleaders for the developers and the banks right up until the crash”. [iii]

It was not too little regulation that created the GFC as much as poorly enforced regulation and the wrong rules. As the majority report of the US government’s inquiry into the crisis concluded:

[it] was the result of human action and inaction, not of Mother Nature or computer models gone haywire. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble. [iv]

President Obama was accused of populism when he channelled the trust busting Teddy Roosevelt in his Osawatomie speech last December. But it was less populism than common sense when he said:

Banks and investors were allowed to keep packaging the risk and selling it off. Huge bets — and huge bonuses — made with other people’s money on the line. Regulators who were supposed to warn us about the dangers of all this, but looked the other way or didn’t have the authority to look at all.[v]

Free markets are only free when the playing field is flat and insiders intent on engineering outcomes that manipulate markets cannot make quick money because ordinary investors have no clue what is occurring.

And free markets are only free when the state regulates to ensure competition can occur not to engineer social outcomes. As Peter Wallison’s minority report in the US Financial Inquiry Commission found:

If the government had not been directing money into the mortgage markets in order to foster growth in home ownership, NTMs (non traditional mortgages) in the bubble would have begun to default relatively soon after they were originated. The continuous inflow of government or government-backed funds, however, kept the bubble growing – not only in size but over time – and this tended to suppress the significant delinquencies and defaults that had brought previous bubbles to an end in only three or four years.[vi]

But this is not information that interests anybody much at the moment. Despite the way the GFC catalysed an inevitable crisis – the inability of European states to support their welfare systems – the idea the state should shape the market seems central now.

Nor is the cause of the market helped by supporters of the banks, like Jennifer Rubin who laughed at Greg Smith. “The items he cites seem like nothing more than aggressive salesmanship. … Next thing you know car dealers will be trying to sell you cars others don’t want, realtors will be pushing you to buy a more expensive home (shhh, don’t tell — but they work on a commission).”[vii]

Jennifer Rubin misses the point, Goldman Sachs is supposed to make money by making money for not from (as is alleged) its clients.

The point about capitalism is it isn’t a club. For the market to work insiders, be they bankers or bureaucrats, have to leave the market alone rather than manipulate it in their own interests.

This never works and always ends up costing ordinary people money.


[i] Greg Smith, “Why I am leaving Goldman Sachs,” The New York Times, March 14

[ii] Kevin Rudd, “The Global Financial Crisis,” The Monthly, February 2009, @ www.themonthly.com.au/monthly-essays-kevin-rudd-global-financial-crisis–1421 recovered on March 18

[iii] Marian Wilkinson and Mary Ann Jolley, “Dicing with debt,’ Four Corners, March 9 @ www.abc.net.au/4corners/stories/2012/03/08/3448633.htm

[iv] US Financial Inquiry Commission, The Financial Crisis Inquiry Report, February 2011, 18 @ www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf

[v] The White House, “Remarks by the President on the economy in Osawatomie Kansas,” December 6 2011 @ www.whitehouse.gov/the-press-office/2011/12/06/remarks-president-economy-osawatomie-kansas recovered on March 18

[vi] Financial Crisis Inquiry Report op cit 472

[vii] Jennifer Rubin, “Breaking up with Goldman Sachs,” The Washington Post, March 14

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