This current financial crisis has destroyed public confidence in the market, stratified sectors considered "main street" and "wall street" and set the American financial system on a path of nationalization and government involvement at levels previously thought impossible. Frequently undercovered in this time of great crisis, though, is the impacts of this crisis on some cornerstone ideologies in the American marketplace of ideas. So in the next few days, or weeks or months, I'll be covering how this current marketplace affects American beliefs, ideologies and their positions in the world. We'll start with a personal pet peeve - the strict adherence to Free Markets.

Principally, I speak of libertarianism - specifically, the idea of economic libertarianism. This is the topic covered by a recent Slate article, which articulates the true cause of this current economic crisis - a credit derivatives market which has been allowed to ballon out of control.

A source of mild entertainment amid the financial carnage has been
watching libertarians scurrying to explain how the global financial
crisis is the result of too much government intervention rather than
too little. One line of argument
casts as villain the Community Reinvestment Act, which prevents banks
from "redlining" minority neighborhoods as not creditworthy. Another theory
blames Fannie Mae and Freddie Mac for causing the trouble by
subsidizing and securitizing mortgages with an implicit government
guarantee. An alternative thesis is that past bailouts encouraged investors to behave recklessly in anticipation of a taxpayer rescue.[....]

As with the government failures that made 9/11 possible, neglecting to
prevent the crash of '08 was a sin of omission—less the result of
deregulation per se than of disbelief in financial regulation as a
legitimate mechanism. At any point from 1998 on, Bill Clinton, George
W. Bush, various members of their administrations, or a number of
congressional leaders with oversight authority might have stood up and
said, "Hey, I think we're in danger and need some additional rules
here." The Washington Post ran an excellent piece this week on how one such attempt to regulate credit derivatives got derailed.
Had the advocates of prudent regulation been more effective, there's an
excellent chance that the subprime debacle would not have turned into a
runaway financial inferno. (SLATE)

While I think the article is too quick to dismiss libertarian excuses for market failures, particularly the third, the point made is sound. Despite repeated claim to the contrary, this failure of the financial crisis is not a failure of one party or another, but a general failure of the ideas which have dominated our financial system since the global market crisis of the late 90s.

I'm not sure if it is the siren call of quick cash and human interest that drives unregulated ventures to failure, as author Michael J. Panzer seems to believe; but, what is clear is that the system of deregulation established by Phil Gramm and furthered by George W. Bush has been an epic failure.

Admittedly, political regulation of economics is a difficult task to do well - considering most politicians are not economists and the complexities of the modern economic system is beyond the understanding of a team of experts, let alone one man. This task is made more difficult by the fact that the market in question, the derivatives market, is harder to regulate than most economic spheres because derivatives generally amount to a contract between two financial institutions. Yet, if the doctrines of the right are to be believed, in such a sphere is where the idea of self-regulation would be at their ideological finest.

After all, if the interest of the investor is truly self-preservation, they would seek to eliminate, rather than distribute, risk and markets built upon unsound investments would be eliminated by economic competition. This view, however noble, is hopelessly naive. It not only fails to account for the often irrational, pack-like actions conducted by even the most emotional of people, but it fails to grasp the general opaqueness of the current marketplace. As the Washington Post article above explains:

By appearing to provide a safety net, derivatives had the unintended
effect of encouraging more risk-taking. Investors loaded up on the
mortgage-based investments, then bought "credit-default swaps" to
protect themselves against losses rather than putting aside large cash
reserves. If the mortgages went belly up, the investors had a cushion;
the sellers of the swaps, who collected substantial fees for sharing in
the investors' risk, were betting that the mortgages would stay
healthy. (Washington Post)

Here is a perfect case study for the failure of deregulated economies. The idea of derivatives are sound in nature as they, theoretically, operate much like business insurance. It allows for the minimization of risks at the cost of potential future earnings. This is a market that was perfect for the beacon of self-regulation to shine through. It was a market geared towards self-preservation, a market that has minimal entrance requirements, and a market that is pervasive throughout the world. What occurred was not an instance of self-regulation and responsible business practices, but an instance of utter failure to head the numerous warning signs of financial instability.

Instead of using derivatives a tool of social safety, they were used as a means of investment for venture capitalist. Under the blind and content eyes of the Bush Administration, we allowed the credit default swaps market, which were the main culprits of the banks' sudden lack of liquidity and capital, to grow from 900 billion in 2000 to about 68 trillion currently. Ultimately, such a system of quick cash-outs and replacing standing capital with derivatives turned a mortgage brushfire into a financial inferno.

What should be perfectly clear to everyone is that such a system was a fundamental failure of the economic mindset that founded it - a mindset steeped in the mythology of utopian capitalism. The next time anyone wants to defend "free markets" as a certain other blogger is liable to do, they should be forced to defend the utter failure of a market so primed for self-regulatory success.

And because I'm neither as creative nor as caustic as Jacob Weisberg, I'll leave his parting words - words that I happen to agree with - as my own.

The best thing you can say about libertarians is that because their
views derive from abstract theory, they tend to be highly principled
and rigorous in their logic. Those outside of government at places like
the Cato Institute and Reason magazine are just as consistent in their opposition to government bailouts as to the kind of regulation that might have prevented one from being necessary. "Let failed banks fail"
is the purist line. This approach would deliver a wonderful lesson in
personal responsibility, creating thousands of new jobs in the
soup-kitchen and food-pantry industries.

The worst thing you
can say about libertarians is that they are intellectually immature,
frozen in the worldview many of them absorbed from reading Ayn Rand
novels in high school. Like other ideologues, libertarians react to the
world's failing to conform to their model by asking where the world
went wrong. Their heroic view of capitalism makes it difficult for them
to accept that markets can be irrational, misunderstand risk, and
misallocate resources or that financial systems without vigorous
government oversight and the capacity for pragmatic intervention
constitute a recipe for disaster. They are bankrupt, and this time,
there will be no bailout. (SLATE)