Business | Markets
Bailouts bad news for free markets
The government, like a knight in shining armour, rides to the rescue in a financial crisis by pledging vast amounts of taxpayer money in what has been dubbed: "The bailout to end all bailouts."
- Reuters
- Published: 00:04 September 22, 2008
New York/Chicago: The government, like a knight in shining armour, rides to the rescue in a financial crisis by pledging vast amounts of taxpayer money in what has been dubbed: "The bailout to end all bailouts."
No, this isn't Thailand, Indonesia or even Italy. It's the US, and some people are wondering if the dramatic events on Wall Street and in Washington spell the end of US-style free market capitalism.
"It's a bitter pill for all those to claim that unfettered free markets were the best, that we don't need regulation," said Dan Seiver, finance professor at San Diego State University. "But perhaps this idea that unfettered capitalism is the way to go has finally been put to rest."
The US government put curbs on short-selling and offered guarantees to money-market mutual funds on Friday as it worked on a sweeping bailout to mop up hundreds of billions of dollars in poisonous mortgage debt. That followed government bailouts of three financial giants already this month.
"While Wall Street celebrates, the man in the street should be crying in his beer," said Seiver. "It's socialism for the rich, capitalism for the poor."
So far, the government has thrown well over $1 trillion at the credit crisis.
Wide impact
Jeffrey Frankel, an economist at Harvard's Kennedy School of Government, said the latest steps were necessary, but would impact everything from the deficit to inflation.
"These are people who, a short time ago, would have said they would never do such a thing, and mostly they meant it," Frankel said. "It had to be done. The question is to what extent it marks a shift towards more intervention."
He said there would be pressure for more regulation as a trade-off for government bailouts, but said history indicated policy makers tend to demand deregulation in good times then "bail out like crazy" when a crisis hits. "It's millennia that people have been not fixing the roof when the sun is shining, and then when it rains saying 'I really should have fixed that hole'," he said.
Sharyn O'Halloran, professor of political science at Columbia University, said the government action addressed the short-term liquidity crisis as well as the medium term problem of dealing with bad assets.
"On the longer term regulatory structure issue, there's no strategic thought or plan in place, and that's really what's problematic," O'Halloran said. She said the current US system was "a morass of regulation" that needs reform.
Raghuram Rajan, finance professor at University of Chicago's Graduate School of Business and former chief economist with the International Monetary Fund, said the government had rushed to spend public money without trying all the private sector solutions.
"In times of crisis, broad principles tend to be forgotten," he said, adding: "Given how close we are to the election, there is a tremendous amount of political pressure to do something, to not appear as passive, and that to me is potentially distortionary."
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