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Unbridled capitalism can falter

Full Speed to Port

Posted: July 9, 2008 1:39 a.m.
Updated: September 9, 2008 5:02 a.m.
 
Republicans and conservatives flash their laissez-faire card whenever confronted with defending the purist characteristics of the ideal free-market economy.

The origin of the expression "laissez-faire" is French, first uttered by a group of businessmen who were asked what the government could do to help them.

The businessmen's answer was essentially: Leave us alone. The idea is that business goes on very nicely and will solve its own problems. It is a call to governments to be aware of economic problems but do no more than that.

The "hands off" concept, along with low government-imposed taxes and holding down costs with a free-labor market (which in its pristine form, means death to labor unions), are all characteristic of the conservative economic ideal.

These ideas were cast in concrete by Nobel Prize winner Milton Friedman and his wife, Rose, in his book "Free to Choose."

Perhaps you have noticed Republicans' stuttered responses to the current crises and their effects on the economy. Little has happened since stimulus checks were sent out to most of us, or since Federal Reserve Chairman Ben Bernanke dramatically rescued Bear Stearns.

Those acts were designed to prevent a meltdown of the credit system, and probably of the whole planet. The fact that this took place is a signal of the severe credit crisis we are in.

Conservatives are aware that in times of crisis, liberal forces may want to take advantage of the situation and make radical changes that could reduce the freedom of their favorite allies, corporations and business forces in general.

What was it that caused the crisis? Was it over-regulation? Or was it little or no regulation of hedge funds and loan companies?

Obviously, the latter. Hedge funds live on astronomical amounts of borrowed money that in turn is used to buy investments that investors expect to make colossal gains on.

They blew it big time when financially-strapped people quit paying their mortgages. Hedges had bundled home loans into investment packages for their customers. It got to be a can of worms when some loans in a bundle went bad and others didn't.

That mess continues to be sorted out and is a metaphor for the complexity of the current situation.
But what if things had been regulated in the first place? Some think a regulation that would slow down the hedge fund betting game would be to increase the interest rate for hedge borrowing.

Hedge funds have been an economic problem for a long time. The government, including Congress, has avoided treading on hedge fund cowboy practices for years.

Why? We are talking here not of the rich but of the super-rich pension funds and individuals who invest in the instruments hedges funds create.

Would you believe that hedge fund managers are well connected in Washington? Surely you don't believe that we have the best Congress money can buy. Please.

As an example, things were not good for the U.S. economy in August 1998. Russia had defaulted on its sovereign bonds, and stock markets tanked.

A freeze was put on global credit markets, and the gigantic hedge fund Long-Term Capital Management was on its way to the toaster. But this time we had a Democratic administration that saved the financial world by adjusting interest rates and pouring huge amounts of cash into the system.

So whatever your financial views, it's obvious that government, even Republicans, is ready for intervention when conditions demand it.

So now we are facing a new crisis with words like "credit crunch," "sub-prime loans" and "foreclosures" piling up like tree limbs on beaver dams, halting the flow of financial streams.

The government has come to the rescue painfully, but what if there had been regulations to prevent this crisis in the first place? Bailout schemes are good for Wall Street. but not so good for Main Street, which finally pays for them.

We all know it's about money, don't we?

Not all agree that greed is the basic motivation for successful capitalism. But judging from the number of business leaders, including CEOs, who are going to jail, there certainly are a lot of multi-millionaires whose assets and power are apparently insufficient to satisfy their egos.

Thankfully, at some level the government is doing something right by sending these scoundrels to the slammer.

So if it helps the economy for the government to bail out investors, what's wrong with that?

The problem is that big-time investors such as hedge funds may become less cautious in their financial commitments knowing that the government will be the insurance company of record.

They may be encouraged to make their profits through more risky investments up front, and when things go sour, place a call to Washington to fix it.

The question is, when does laissez-faire encourage business and when does it hide massive corruption?

Phil Rizzo is a Santa Clarita resident. His column reflects his own views, not necessarily those of The Signal. "Full Speed to Port" appears Wednesday in The Signal and rotates among two local columnists.

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