Our free market system: Free to lie and cheat

Much of the financial crisis was created by thousands of banks and loan officers throughout the country.  It was getting more important to originate loans and then sell them to others.  The more loans originated, the more money the loan officers and their banks would get.  They didn't have to worry about risk because the buyers of the loans assumed the risk.  Because the loans were packaged and sold again, the end buyers had no idea of the risk.

One of the ways to originate more loans was "stated-income".  Either the borrower was allowed to state any income needed to get the loan or the loan officer encouraged the borrower to overstate the income.  The actual income was not verified in either case.

See "I Worked For A Major Mortgage Company, And What We Did Was Criminal", Michael David White, Business Insider, 2010-04-22.

Many think that any action by government to curb excess is interference in the "Free Market".  Would any professional sports team play without referees and umpires?  I doubt it.  All the teams of a league pay into a pool to pay for the leagues referees and umpires.  Managers and players may complain about individual decisions, but  doubt they would like to settle any disputes themselves.

Let's think about government as a referee in the sport of business.  One branch of government sets the rules.  Another, independent, branch of the government enforces the rules.  A third, also independent, branch settles disputes about the rules.  Corporations and individuals pay taxes to support government as a referee.

What would the "free market" be like without these systems of rules?  Would Apple go to war against Palm if Apple felt Palm was infringing on its patents.  Would the Beatles and their fans go to war against Apple because the Beatles felt Apple was misusing their trademark?

And what about individual citizens, should the "free market" be allowed to defraud, maim, and kill people in the name of bigger profits?  With no recourse to their government for the citizens to redress these grievances?

There is no easy answer to what is too much government and what is too little government.  We have too many people thinking that all government is taking the "people's freedom" away.  And we have too many people thinking that government is not doing enough to protect the "people's freedom" from "rapacious corporations".

We're sorry, Wall Street???

For a marvelous piece of sarcasm, read, "Dear Wall Street, We're sorry" by David Weidner, MarketWatch, 2010-01-26, subtitled "How the Little Guy Ruined Wall Street".

Free market is a construct, not reality

Some write that there should be no bail-out of borrowers who are defaulting on their loans. These commentators write that the borrowers willingly entered into a contract and should accept the consequences of their inability to pay. These commentators also say the lenders shouldn't get any help as the lenders also willingly entered into a contract.

Like "there ain't no such thing as a free lunch" there ain't no such thing as a free market. Those who preach about a free market also forget about the detail of externalities. Few transactions are between a willing buyer and a willing seller with no effect on anybody else. If a dealer sells a car to a buyer who knows the brakes are bad, it may be a third party who suffers damage to life, limb, or property when that car doesn't stop. If a factory belching smoke sells its products far away, it is the people who live nearby who suffer the effects of pollution.

Similarly, a large number of defaults can affect more people than the borrowers and the lenders. More conservative lenders are going to take even more care choosing their borrowers. This in turn will drive up interest rates for more solid borrowers. There are already stories about the "credit crunch".

Defaults of home mortgages are going to put more houses on the market. A larger supply of houses is going to depress prices for those who would like to willingly sell their houses. The depressed prices may be good for potential buyers, but the increased mortgage rates and decreased availability of money to lend could offset the low price benefit. This could lead to fewer buyers which would lead to even lower prices.

Low demand for houses also affects realtors and builders. The lower earnings for these two groups could also lead to less spending by them in other areas, like autos and appliances and many other goods and services.

Fewer purchases by more people leads to a slower economy. Couple this with rising fuel costs, is it any wonder the stock market is in turmoil?