Bring Back Our Free Markets

Since the financial crisis began nearly a year ago -- when the government helped JPMorgan Chase (NYSE: JPM  ) bail out Bear Stearns -- I've been wholeheartedly against the way our leaders have handled the situation. As a strong proponent of free markets, the bailout of General Motors (NYSE: GM  ) , I've had chills run up my spine at the sight of all of the assistance to banks (such as PNC's (NYSE: PNC  ) acquisition of National City) and the injection of capital to keep the likes of Citigroup (NYSE: C  ) buoyant.

While investors have not responded kindly to much of the action, many Americans -- 68% according to a recent MSNBC poll -- give the thumbs-up to President Obama's plan to revive the economy.

Of course, we humans are impatient. And the government's moves thus far all seemed as if they were quick fixes to the massive crisis. But now, our government has accumulated a bailout tab upward of $10 trillion, and there has yet to be even an inkling that the spending is sparking any economic growth -- GDP dropped by an annualized 6.2% in the fourth quarter. Continuing in this direction could make Ben Bernanke's call of a possible market bottom by 2010 off by more than a decade.

Allow me to explain …
When the government takes our tax dollars and invests them into businesses on the brink of failure, they are effectively stalling the growth of our economy; large sums of capital are being employed in risky assets that have a high probability of remaining unproductive. Yes, they are saving jobs now, but they are artificially keeping underproducing businesses alive, which will ultimately stall the growth of our nation in the long run. Rather, the government needs to let these businesses fail so that we are left with businesses that will generate long-term productivity and positive returns for our economy as a whole.

Patience is a virtue
The bailouts are undoubtedly cushioning the blow. However, attempting a speedy recovery will be costly and will postpone recovery. We cannot be hasty about this recovery. We spent the better part of a decade writing bad loans, spending excessively, and leveraging to obscene levels. Consequently, it will take us a long time to unravel those mistakes and to resume a normal economic state. That's the penalty we must pay for abusing the free markets. So, how do we let that play out? 

Economic growth (i.e. GDP growth) is achieved through two methods:

  1. Grow the labor supply.
  2. Increase the productivity of that labor supply.

None of the government's actions to date play to these actions. The recently approved $787 billion stimulus may appear to coincide by creating jobs, but its effect will provide temporary relief. This is because by artificially creating jobs, worker productivity will not be optimized. 

Free markets lack rules and regulations. That luxury provides each and every one of us the chance for unlimited opportunity; however, it comes with the chance of failure. We must allow our economy to naturally flush out the underperformers and the less productive entities. We must naturally create incentives for people and businesses to work and produce as efficiently as possible.

By intervening in their current form, the government is effectively ruining that process. I don't advocate intervention, though I recognize that our leaders, historically, have always mediated the economy to a certain degree. If anything, why not spend to educate Ford (NYSE: F  ) employees and train them for a future job at a corporation that adds value to our economy? Or how about giving tax breaks to companies such as Google (Nasdaq: GOOG  ) to help encourage thriving businesses to expand and hire (rather than lay off) workers? Keeping Americans employed is vital to our economy. But keeping them working in failing businesses will not increase the productivity of our nation.

At first I was afraid, I was petrified … but I'll survive
Like the tech-bubble era, we can survive this crisis without a massive government intervention. Think of this period as a housecleaning of our economy. We will wipe away the parts that ultimately don't belong in a prosperous economy in the same way we allowed the unprofitable dot-com companies to go under. Only the strong survive.

Rising unemployment resulting from entities that fail will be very painful in the short run. But new businesses will form and technology will improve as individuals seek profitable ventures. And as a whole, our economy will inevitably grow more robust than it ever was. It will be a long an distressful period, but it is what will ultimately allow America to emerge from this recession in its strongest form.

It's too late to go back on the decisions that have already been made, or take back the money that has already been spent. But for the sake of our economy's future, I ask our leaders to stop mugging our nation and to let the free markets govern us back to prosperity.

Related Foolishness:

Fool contributor Kristin Graham does not own shares of any of the companies mentioned in this article. Google is a Rule Breakers selection. The Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 04, 2009, at 11:02 AM, Robobank wrote:

    May I suggest that if AIG and Citi were allowed to fail you would probably still be terrified and for good reason (and if I remember correctly several have been allowed to fail). More importantly lets not forget that within the banking industry, and even AIG, it was a fraction of the business that created this crisis and not the core business segments. Those business segments, such as structured finance, have been allowed to fail. We should not throw out the baby with the bath water.

    Regarding the impact of policy decisions, it took us decades as you correctly point out to get to this point of overleverage, perhaps we should give the policies more time before we declare them a failure. There is a time for big government-this is it. Let them do their job and get small again.

  • Report this Comment On March 04, 2009, at 11:25 AM, acorn72 wrote:

    You free market people damn near destroyed our economy and you keep on bitching about some control. Get real, people. One madoff is enough!!

  • Report this Comment On March 04, 2009, at 11:35 AM, psprakash wrote:

    Quote: If anything, why not spend to educate Ford (NYSE: F) employees, training them for a future job at a corporation that adds value to our economy.

    Evreyone keeps on saying train for future jobs and the talk is cheap. Can u show one field(other than healthcare not easy to get trained overnight) that is hiring now.

  • Report this Comment On March 04, 2009, at 12:10 PM, dgelbman wrote:

    I am all for free markets that are regulated to what is in the best intetest of this county long term. Gov policies and corporate greed got us into this mess. Financial industry de-regulation and credit default swaps made this problem a lot more complex and severe. One needs to fully understand the problem before trying to solution it.

    Please read this:

    http://www.wealthdaily.com/report/the-architects-of-destruct...

    Totally free markets and no gov intervention isn't the answer and it would create a world depression. Smart gov action is required, not wastefull spending. Those running companies that took on too much risk, made bad decisions should be let go, but other companies who in good faith didn't assume these risks but are related need to be protected to a certain degree.

  • Report this Comment On March 04, 2009, at 12:26 PM, acorn72 wrote:

    I agree with dgelbman. Spot on comment.

  • Report this Comment On March 04, 2009, at 12:26 PM, Tamerz wrote:

    "You free market people damn near destroyed our economy and you keep on bitching about some control. Get real, people. One madoff is enough!!"

    If you think that free market caused this, you need to do a little more research. Government caused this.

    I think Peter Schiff explained it best:

    "Were it not for the excessively low interest rates provided by the Fed, the lax lending standards and moral hazards supplied by Congress courtesy of Freddie, Fannie, and the FHA, and the many real estate subsidies built into the tax code, none of these predatory loans would have been possible."

    This mess would not have occurred in a truly free market.

  • Report this Comment On March 04, 2009, at 12:55 PM, acorn72 wrote:

    Tamerz,

  • Report this Comment On March 04, 2009, at 12:57 PM, acorn72 wrote:

    Tamerz, you telling me that you don't think the massive de-regulation of our economy didn't cause this meltdown frightens me.

  • Report this Comment On March 04, 2009, at 7:47 PM, focusedenergy wrote:

    The government did not, by any method direct or indirect, make AIG, as one example among very many, write billions of dollars of credit default swap insurance instruments that is the cause of their massive needs for infusion of capital and that are the main reason that AIG could not be allowed to fail because of all of the companies that would be severely affected and the almost complete halt to the credit markets that would result as well. Government did not cause this crisis by mandating FreddieMac and FannieMay create mortgage loan programs that allowed people to get mortgages that were unstainable by the borrower. The greed of the business sector and individuals created the crisis. New financial instruments and using a home as a speculative trading intrument are at the core of the causes of the crisis.

    If the U.S. government had not intervened the author of the article we are commenting on, along with the rest of us, would not likely have any market, free or otherwise, to participate in. Perhaps the author has enough capital reserves in valuable hard tangibles that she sould survive the wiping out of the US banking system, the US currency value and the near total collapse of international trade with the US that would be the result of the governemetn officials adhering blindly and slavishly to the an purely ideological postion about "free markets' that has never, I repeat never, actually existed in the real world. And, I guess she really does not care what would happen to hundreds of millions of her fellow Americans in regards to destruction of their life situations.

    The world does not really work the way the "free market" idealogues want it to. Soemday they might actually come to realize that fact.

Add your comment.

DocumentId: 843892, ~/Articles/ArticleHandler.aspx, 4/18/2014 2:22:22 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement