My Response to Charles Wheelan

Charles Wheelan, PhD posted this article on Yahoo Finance Friday Oct. 24 entitled “The Twilight of the Free Market.”


In this article, he argues that the “free market” philosophies of the Greenspan Fed period have brought about the end of the era of a free market. For those of you angry about the recent financial turmoil, you might agree with politicians that the ‘free market’ caused all these problems. However, I offer a different view – which is not the easy path of quickly dismissing the problem. Read his article, then read my response below:

The credit issues are NOT an example of the free market. We had government manipulated interest rates, a government guarantee on mortgages and government prodding from most politicians that broke people should buy a home and that lenders should lend to them – politicians of course thought that home ownership would make a happy voter. In a free market this would not have happened this way.

First off, let’s pretend you are the lender (so you are lending YOUR money – not the govt’s). You would not lend someone with “limited” documentation YOUR money at 4% would you? And you would require more than 20% down payment wouldn’t you? You wouldn’t just (wink) trust the borrower not to default right? Ok then let’s agree that in a free market, whose pricing is determined by a willing buyer/willing seller exchanging goods, the recent mortgage market would NOT have happened.

It is evident anecdotally in the current banking environment. Opposite to what happened in the 1980’s, the smaller banks near me(e.g. Brookline Bank, Century Bank), which lent their own money and required higher down payments, are still in business (still profitable) and sport high equity to asset ratios. Compare that to the recently departed Lehman or Bear, where the REGULATOR told them it was ok to lend out 33 dollars for every dollar on the books (equity to assets ratio of 3%), and you can see why one group is still in business and one isn’t (at least not w/o the bailout.

What we did have was privatized profits and socialized losses. And we also have a public that has been shielded from pain by foolish government policies for years and now many people can’t handle the slightest bit of discomfort. This behavior is most extreme in places like China, where home purchasers are demanding their money back from developers who are selling units currently at prices below where current residents bought. If the values went up, these people wouldn’t complain. So let’s not blame the free market – though thoughtless politicians will, since the free market can not argue back and it’s always nice to have a scapegoat.

A final note – regulations are on the books which could have prevented this. Alan G-daddy Greenspan could have raised rates or increased bank reserve requirements, OR even used the bully pulpit of the Fed to discourage all of this. He chose not to – he instead went the other way and created it – and ENABLED all the subsequent bad behavior – but make no mistake, without 1% rates, and the government guarantee on loans sold to FNM, this problem would probably not exist. save money, don’t listen to your government and don’t spend to “keep the economy going.” protect yourself…


 Chris Grande