In the midst of reading about a protest against naming a new institute at the University Chicago for one of its best known Nobel laureates, Milton Friedman, I received an e-mail with a recent speech given by Leo Melamed, chairman emeritus of CME Group, to the Financial Innovation Conference at Vanderbilt University. This was quite ironic as Friedman was a hero to Melamed and played a central role in legitimizing the CME’s International Monetary Market (IMM), which transformed the futures industry from a niche agricultural market to one of global finance.
Melamed was standing up for free markets as surely Friedman would be doing if he were still alive.
The reason for this defense is that a consensus is forming that the current economic crisis can be blamed on free market ideology and this crisis will mark the end of an era that idealized Friedman’s philosophy and led to a shedding of many government regulations.
The protest at U of C questioned the reverence accorded to Friedman given our current economic crisis. While the sentiment is understandable, it ignores the role our government has played in the crisis.
Despite the best efforts of Friedman, his free market philosophy has never been close to being adopted in total. And of late, a system of influence peddling where special interests can carve out their own rules even utilizing the largesse of government when necessary to support their initiatives, has taken root.
Worse yet, executives at investment banks and other industries would support free market principles when it suited their purposes while at the same time lobbying government for special favors. Friedman warned of this in an article he wrote in 1999. “I do blame businessmen when, in their political activities, individual businessmen and their organizations take positions that are not in their own self-interest and that have the effect of undermining support for free private enterprise.”
One of the most frustrating aspects of this entire episode is to hear our leaders at the Federal Reserve and Treasury debate so called “moral hazard.” That is to what extent a bailout — the so called bailout out Bear Stearns for instance—would lead banks to take on excessive risk. Given that this argument occurred while every major U.S. investment bank was already arguably insolvent, is somewhat comical. Lets remember that the Fed dramatically lowered interest rates at a time with high inflation and supposed 4% + growth in GDP to help investments banks out of this mess. It is pretty clear that the entire housing bubble, subprime debacle and resultant credit crunch and solvency crisis is the result of moral hazard. That moral hazard was not created by a free market philosophy with its Darwinian underpinnings but by a belief in board rooms that “too big to fail” banks would not be allowed to fail and by a compensation structure that awarded a short-term focus with no thought to the long-term.
It is just as fair to argue that it is the depth of government involvement in markets that has allowed this as a lack of government oversight. It is this invoIvement that made the leap to a government solutions so easy. Melamed noted,"I am lamenting that U.S. government officials were in such a state of panic that they abandoned market solutions in favor of Third-World sorcery like blaming speculators and banning short-selling. I am lamenting the fact that all the world’s capitalists have turned to the government for salvation. I am lamenting the fact that federally inspired rescue operations were so quick to surrender the fundamental free market principle that mistakes by the private sector must be borne by the people who made them."
Melamed describes this as a rigged game in his speech and pleads not to misplace the blame. “The dictates of the free markets are always stymied by a monopoly, a cartel, or the actions of government. It would be a tragic misdirect and a perverted leap of logic if the conditions that caused the global meltdown, the transgressions that occurred within the private sector, or the regulatory reforms that are required, were blamed on the precepts that made this nation so great.”