The Wall Street Journal's token liberal columnist, Thomas Frank, managed to write yet another misinformed piece in an edition of the paper last weekend.
In a pre-Thanksgiving piece, he held forth on how thankful he is that last year's and this year's financial mess have muzzled those who argue for free markets. In his view, what befell the US economy and financial sector in the past year is a complete failure of free market ideology.
How wrong he is.
For many years, there has been an undercurrent of concern regarding the financial audits required of listed companies. Instead of actually assuring anyone of much of value, SEC-mandated audits lulled investors into ignorance, resulting in the Enron and WorldCom scandals.
Similarly, FDIC insurance for bank deposits caused retail customers to pay less attention to the actual health of their banks. It may seem like pocket change to pay off consumer deposits when insured banks go broke, but that money has to come from somewhere. The FDIC's outflows in recent years have exceeded their inflows from bank insurance levies.
Result? Society at large pays for the risks which indifferent consumers take with their money.
How about Fannie Mae and Freddie Mac? Their GSE status caused everyone, including the Chinese government, to blithely assume that their bonds were as sound as Treasuries. Thus, nobody really paid any attention to the trash which Congressional leaders demanded the agencies to create out of mortgage loans to increasingly poorer, riskier home buyers. Low-doc, no-doc and option ARM mortgages became components of pass through bonds backed by the US government. Ratings agencies went along for the ride and income. Oh, they are protected, too. Special exemptions in US law allow them both an oligopoly and protection from lawsuits for their opinions and ratings.
It was mortgages cranked out by the private financial sector, passed through the GSEs and turned, like rancid sausage, into something different-looking, which polluted financial markets and ultimately led to severe equity losses on the book of several of the largest US commercial and investment banks.
Nowhere in all of this were so-called "free markets" operating. No, it was all coddled and wrapped in a big green blanket of US government guarantees, insurance and regulation.
These alleged safeguards are precisely why nobody bothered to conduct any serious due diligence of their own.
When mediocre civil servants couldn't even do their regulation and oversight jobs effectively, the whole mess exploded.
Thus, Frank got it completely backwards.
Last year's penultimate financial service sector problems stemmed from too much legislation, regulation and insurance by the federal government which supplanted investors' sound judgements and critical appraisals of risks. Risks of institutional failures, instrument quality and repayment failures.
We don't have too much free market capitalism which needs more regulation and supervision.
We have too little of the former, and far too much of the ineffectual latter.
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