In Defense of Markets

As the crisis on Wall Street tempts the politicians, someone needs to put in a word for free markets. Senator Obama is rushing to blame the Bush administration and New Yorkers and calls for more regulation. "The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren't minding the store," Mr. Obama said in a statement yesterday.

He added: "Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression."

One might think the Democrat would be answered by the Republican presidential candidate. But Senator McCain is reacting to this opportunity by warning that American workers are being threatened by "the greed and corruption that some engaged in on Wall Street." Added Mr. McCain: "From Washington to Wall Street, the top of our economy is broken. We've seen self-interest, greed, irresponsibility, and corruption undermine these hardworking American people. We're going to put an end to the abuses in Washington and on Wall Street that have resulted in a crisis that we are seeing unfold today."

The Republican went on: "Enough is enough. Enough is enough. We're going to reform the way that Wall Street does business and put an end to the greed that has driven our markets into chaos. We'll stop multimillion-dollar payouts to CEOs that have broken the public trust. And we'll put an end, as I said, to running Wall Street like a casino. We'll make businesses work for the benefit of their shareholders and their employees, and we'll make sure that your savings, IRAs, 401k and pensions are protected." The McCain campaign yesterday released a television commercial promising "tougher rules on Wall Street."

The top Democrat in the Senate, Harold Reid, offered his own assessment: "What we are seeing on Wall Street is the legacy of the Bush-McCain economic policies that have failed this nation. Failing to police lenders and neglecting to protect consumers ushered in the sub-prime crisis that has brought the American economy and Wall Street to their knees." Mr. Reid insisted that "America needs another economic recovery package," and he encouraged Mr. McCain "and other Bush Republicans in Congress to work with Democrats to pass a second economic recovery bill."

Meanwhile, the Republican administration's Treasury secretary, Henry Paulson, a former chief executive of Goldman Sachs, appeared at the White House to announce that in his view, "the root of the problem lies in this housing correction." He said he was "making sure we have plenty of finance in housing," and said, "there is a risk-able chance that the biggest part of this housing correction can be behind us in a number of months."

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Well, let us just say that there is a risk-able chance that none of these politicians has it right. If not even our leading Republican politicians are going to speak up for markets at this juncture, allow us the opportunity. America got into the subprime housing crisis not only because of errors in the business community but because our governmental authorities sought to encourage greater diversity in lending, because the Congress and our monetary authorities failed to protect the value of the dollar, and because all too few in our political leadership respected the market in the first place.

To where has wisdom fled Washington? Senator Obama's claim that the problem is the policies of the Bush administration doesn't stand the test of reason. The Bush administration was in office and its policies were in effect in 2003, 2004, 2005, and 2006, when the American economy, the housing market, and the stock market were doing pretty well.

Senator McCain's claim that the problem is "greed and self-interest"? Both are necessary ingredients to a capitalist economy and elements of the human condition. It's hard to believe that Wall Street bankers were any greedier or more self-interested in the past year or two than they were in the 1980s or the 1990s. As for "corruption," while federal criminal charges have been filed against two Bear Stearns managers, it would be a catastrophic mistake, as a general matter, to criminalize risk-taking that did not work out as planned.

Mr. McCain's promise to "stop multimillion-dollar payouts to CEOs that have broken the public trust" came after the government announced it would not pay the outgoing executives of Fannie Mae and Freddie Mac the money they are owed. That news did not prevent a 500-point drop in the Dow Jones Industrial Average. And it has been the market, not any government regulations, that has devastated the net worth of CEOs whose judgment proved unprofitable.

Secretary Paulson's claim that the problem is housing prices and that the solution lies in easy money for mortgages? While the Case-Schiller index of national housing prices is down nearly 20% from its 2006 peak, it is up about 42% from the beginning of the Bush administration. Didn't easy mortgages for overpriced properties contribute to the current problems we do have? What is Mr. Paulson doing offering more of the same as a solution, and what is the logic of making taxpayers the lender? Mr. Reid's recipe of "another economic recovery package"? The first one doesn't seem to have been a panacea. Chances are that what Congress calls an "economic recovery package" would amount to borrowing more money from China to pay for American government spending that American taxpayers would eventually have to pay back.

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The biographer of John Maynard Keynes, Lord Skidelsky, writing in the adjacent columns, reckons the current crisis will mark the end of an era, in which the conservative cycle that some of us call the Age of Reagan and the Age of Thatcher will give way to a new cycle of liberalism. He cites what he calls "cycles of economic fashion" that he reckons are "as old as business cycles." But a headline on www.nysun.com — "Wall Street Weathers Worst Drop Since September 11" — put us in mind yesterday of the astounding resilience of the American economy. If only the enduring laws of economics and markets are allowed to work.

The years after 2001 brought an unprecedented boom to Wall Street, New York City, and much of the rest of America. Notwithstanding the costs of a war and a historic hurricane named Katrina, vast wealth was created and widely dispersed. The introduction of Apple's ipod, the public offerings of Google and of the Blackstone Group, the building boom in New York City, the opening of Time Warner Center — all these happened after the September 11 attacks.

Despite yesterday's stock market downturn, the bankruptcy of Lehman Brothers, and the disappearance of Bear Stearns and Merrill Lynch as independent financial houses, positive economic signs are to be seen. The dollar has been strengthening, oil prices have been weakening, and American employment and growth are stronger than those of Europe. Even after yesterday's fall, the Dow Jones Index of U.S. financial stocks is actually up about 10% from its mid-July low. Mr. McCain was mocked by the Democrats, but he was actually right when he said the fundamentals of the American economy are strong. They will need to be to withstand the efforts of the current crop of politicians.