It astonishes me to see how quickly this country has embraced a socialist mentality and how readily it has accepted the belief that the source of our problems was an unfettered free market. Perhaps it is because those in power do not understand what the term free market truly means. If they indeed understood what a free market entails, then it would be impossible for them to lay blame upon it.
A free market can be defined as a certain population of individuals that are allowed the freedom to make independent decisions as to what they want to produce and consume with their capital. It is the votes they cast with that freely allocated capital that provides for maximum efficiency and growth.
But the credit crisis that began last year has been used as an excuse to vilify markets and promote government sponsored usurpations of Detroit and financial institutions. The war against markets was stepped up in June when the Obama Administration sought to overhaul the financial regulatory system. Again the free market was blamed for the greed and excess of banks and Wall Street. The solution proposed was to set up a new regulatory body called the Consumer Financial Protection Agency and to merge the Office of Thrift Supervision with the Office of Comptroller of the Currency. The Fed and Treasury would also have their powers expanded.
The point that government refuses to recognize is simple: it does not matter if you create fifteen new agencies with thrift oversight responsibilities. It wasn't the fact that we had a dearth of supervision that caused systemic over-leverage to occur. It was the knowledge that if a financial institution got in trouble, the Fed would avail them of an unlimited amount of money at near zero percent interest. As long as the Fed continues to inculcate that bail out posture, the situation is guaranteed to again occur in the future.
The regulation drum beat continued yesterday with the announcement that the Commodity Futures Trading commission (CFTC) would seek to restrict commodity futures holdings of index and exchange-traded funds. Once again the free market is blamed for allowing rampant speculation in oil and other commodities that drove the prices unreasonable high. But the facts just don't support any such claim.
What they want us to believe is that it was greedy speculators that drove oil to a record high of $147 per barrel last summer. Not that the move had anything to do with the intrinsic supply/demand metric or the fall in the U.S. dollar. I wonder if they also blame speculators for the fall in oil from the $147 in July 2008 to $33 a barrel in December 2008.
The truth is that at the time oil reached its all time high, the explosion in money growth from the commercial and shadow banking system drove M3 up 16% YOY in July 2008, which concurrently sent the US dollar to an all time record low of just above 70 on the Dollar Index. In addition, there was the synchronized boom in global GDP in 2007 that put pressure on oil supplies into 2008.
But by the end of 2008 the dollar soared to actually close the year up 7%. The collapse of the shadow banking system caused a decline in the rate of money growth and global GDP rates came crashing down. Of course none of this is viewed by government as the reason why oil traded down to $33 a barrel by the end of the year. All that is sought is to use the volatility in commodity prices as an excuse to impose more regulation on the private sector. What they ignore is the fact that speculators help increase the liquidity of markets and are essential for their proper function.
As long as failure is allowed to occur, the free market is effective. It is only when government interferes with the cathartic process of creative destruction that the system collapses. Unfortunately, what we see today is the exact opposite environment being promoted, with a huge increase of meddling into the private sector by government. Instead of blaming the market our government should be working to supply a level playing field and provide maximum incentives for the private sector to flourish. Until we re-embrace the idea that markets are the solution not the problem, look for continued erosion in our economy and our freedoms.