Caroline Baum Rips on Government Intervention

From Bloomberg:

Before you can declare free markets a failure, you have to establish that they exist, says Paul Kasriel, chief economist at the Northern Trust Co. in Chicago.
“We do not have free markets in credit in the U.S. or anywhere else that I know of,” he says. “The price of short- term credit is fixed by central banks. It would only be by accident that a central bank would fix the price of short-term credit” at the precise level that a free market would.

Chosen People

Fixing the price of any other commodity, including labor, has proven to be a failure, an affront to the inviolable invisible hand. Yet when it comes to setting the interest rate that will keep the economy on an even keel, we put our faith in a chosen few to get it right.

All sorts of unintended consequences flow forth from central bankers’ fixing of a short-term rate. Hold the rate too low, and it leads to a misallocation of capital into, say, housing or dot- com stocks. That’s what happened in the late 1990s and again in the early part of this decade.

“We are now experiencing the economic and financial market fallout from (Alan) Greenspan’s interference with the free market,” Kasriel says.

In a true free market, risk-takers are punished for bad bets. Not so in the current crisis, where financial institutions -- with the exception of Lehman Brothers -- are deemed too big to fail and rescued, merged or recapitalized.

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