This morning I watched Fareed Zakaria GPS on CNN. He interviewed George Soros who presented the most intelligent and balanced view of the current financial crisis I’ve seen yet. Soros – a free marketeer – points out that free markets are human constructs, just like governments – as such both are imperfect. His stance is the market is more efficient and perhaps better at solving problems – but not perfect – and left to it’s own devices suffers from problems as bad or worse than well designed regulation.
SOROS: Every bubble has two components: something – some real trend, and a misconception about that trend.
Now, the real trend has been credit expansion, ever-increasing use of leverage. And the misconception has been what I call market fundamentalism, the belief that markets correct their own excesses, that you can leave it to the markets, give them free rein.
And, of course, that’s false. The markets don’t tend towards equilibrium. And occasionally, therefore, they create financial crises.
But it really started with President Reagan, who talked about the magic of the marketplace, Margaret Thatcher. You see, when they came to power in 1980, then this belief became the dominant creed. And this, then, led to the globalization of markets, the deregulation of markets and the increased use of leverage and all those financial engineering.
Now, since markets don’t tend towards equilibrium, but are – left to their own devices, go to extremes and create bubbles. And then the bubbles burst.
We have had a number of financial crises since 1980, and quite a few of them. But each time the authorities intervened, and, you know, merged away the failing institution, stimulated the economy if necessary, lowered interest rates, fiscal stimulus, and so on.
And so, the crises, the previous crises actually reinforced the mistaken belief that markets correct their own excesses.
What Soros is telling us is that we’ve swung too far to free market thinking. And I’m with him. It isn’t that I want socialism or government control of the economy – it is that I want balance. Our error was swinging the pendulum too far to one side – and it has to come back.
Will we swing it too far toward government involvement and regulation – probably. But that isn’t what we should be afraid of – we should be afraid that dogma will outweigh outcomes. If that happens we will insist on free markets and vilify regulation because we believe it to be so. That is what will cause the current situation to spiral out of control.
To be clear – I’m a fee marketeer – but the market exists within the bounds of society. And governments are social contracts designed to form well ordered societies. They define the guardrails within which we operate freely. It is time to put the regulatory guardrails back in place.