In an op-ed at the Wall Street Journal, We Need a Bailout Exit Strategy, SEC Chairman Christopher Cox laments the current bailout mentality insofar as the government hasn’t declared an exit strategy for meddling with the markets, becoming a player as well as a referee. But as long as “the arm’s length relationship between government, as the regulator, and business, as the regulated” is maintained, bailouts are fine and government intervention is necessary.
Financial markets, of course, are not perfect. In particular, they are susceptible to boom-and-bust cycles. Cycles of this sort have been a hardy perennial over the past 400 years of experience with organized markets. Addressing the results of these cycles is why we have protective mechanisms such as the Federal Reserve System and federal deposit insurance. But clearly these mechanisms proved inadequate to prevent the current crisis.
Just two quick points about this. First, boom-and-bust cycles are an assumed, if not welcomed, part of financial markets. A recession is simply a market indicator that too much credit has been extended. It’s like calling a timeout during the game to take a breather and figure out what the next play will be. And second, government intervention to “address the results of these cycles” only exacerbates the problem. The mechanisms that were supposed to prevent boom-and-bust cycles caused the current crisis. Artificially low interest rates over the past several years extended the boom when a free market would have curtailed it, and caused a bigger bust instead of a small market correction.
But even though he defends an “arm’s length” amount of intervetion, Cox makes some good points defending free markets.
Our emphasis on private ownership is directly tied to America’s dedication to individual freedom. It’s in our DNA. It is, in large part, why the United States came to be at all. Our Declaration of Independence is a recitation of the abuses of excessive government power. Our Constitution is a brilliantly crafted system of checks and balances to prevent that abuse by limiting government’s authority over individuals — including in the economic realm, where we’re guaranteed our constitutional rights to liberty and property, to freedom from expropriation, and to freedom of contract.
But beyond that, beyond ideals of freedom, the national preference for private ownership is also based on the most basic practicality: It works. America’s rise from New World outpost to global superpower was fueled by the dramatic growth of our free enterprise economy into the world’s largest. Free enterprise has produced spectacular results. Compared to other national economies with substantial government ownership and central planning, America’s economy has been more creative, resilient and dynamic.
We’ve found that decentralized decision-making, in which millions of independent economic actors make judgments using their own money, results in the wisest allocation of scarce resources across our complex society. And we’ve found the market to be more reliable in heeding price signals and meting out discipline to failing enterprises than government could ever be.
I’m writing this post is to call attention to the line “it’s in our DNA.” Cox uses the line as a figure of speech, but it’s more than that.
Our dedication to individual freedom IS in our DNA. On our evolutionary path we lost many tools that help other species survive; e.g. a thick coat of fur to endure the winter (it’s 7 degrees in Chicago right now), or heightened senses to catch prey. But on that evolutionary path we gained the tool that affords us a chance of survival; a conscious and reasoning mind. It is our moral right to use this tool, and in order to use it we must be free from coercion. This moral right phrased so eloquently as “life, liberty, and the pursuit of happiness” is why the United States came to be. With a touch hyperbole, our DNA is red, white and blue.
It’s In Our DNA
In an op-ed at the Wall Street Journal, We Need a Bailout Exit Strategy, SEC Chairman Christopher Cox laments the current bailout mentality insofar as the government hasn’t declared an exit strategy for meddling with the markets, becoming a player as well as a referee. But as long as “the arm’s length relationship between government, as the regulator, and business, as the regulated” is maintained, bailouts are fine and government intervention is necessary.
Just two quick points about this. First, boom-and-bust cycles are an assumed, if not welcomed, part of financial markets. A recession is simply a market indicator that too much credit has been extended. It’s like calling a timeout during the game to take a breather and figure out what the next play will be. And second, government intervention to “address the results of these cycles” only exacerbates the problem. The mechanisms that were supposed to prevent boom-and-bust cycles caused the current crisis. Artificially low interest rates over the past several years extended the boom when a free market would have curtailed it, and caused a bigger bust instead of a small market correction.
But even though he defends an “arm’s length” amount of intervetion, Cox makes some good points defending free markets.
I’m writing this post is to call attention to the line “it’s in our DNA.” Cox uses the line as a figure of speech, but it’s more than that.
Our dedication to individual freedom IS in our DNA. On our evolutionary path we lost many tools that help other species survive; e.g. a thick coat of fur to endure the winter (it’s 7 degrees in Chicago right now), or heightened senses to catch prey. But on that evolutionary path we gained the tool that affords us a chance of survival; a conscious and reasoning mind. It is our moral right to use this tool, and in order to use it we must be free from coercion. This moral right phrased so eloquently as “life, liberty, and the pursuit of happiness” is why the United States came to be. With a touch hyperbole, our DNA is red, white and blue.