Free Markets Forever? Let History Judge

“Let History Judge” was the title of the book of one of my favorite Soviet-era historians — Roy Medvedev. I used to visit him back in the 1980s in his yellow-colored apartment building in the northwest quadrant of Moscow.
His type of five-story building was called a “Khruschovy” after Khruschev because lots were built in the Nikita years of the 1950s and early 1960s. Medvedev’s book also had a Khruschevian twist since it detailed the crimes of Josef Stalin — something permissible only after Khruschev’s “secret speech” of 1956.
Now comes an exhortation of another dynamic Soviet-era leader. Mikhail S. Gorbachev writes in Sunday’s Washington Post that the West could use a little perestroika right now. And he’s damned right about that.
Gorbachev will go down as one of the most important game changers of the late 20th century. He set the stage for the generally peaceful transition of a massive and hateful totalitarian state. His perestroika or “rebuilding” was flawed since it assumed the socialist state could be merely changed instead of dumped, but he still represents an uncanny honesty in analysis. For children of the Cold War such as me, that’s a bizarre irony since we were taught that Communist leaders only lie.
Here’s the essence of Gorbachev’s argument:
“In the West, the breakup of the Soviet Union was viewed as a total victory that proved that the West did not need to change. Western leaders were convinced that they were at the helm of the right system and of a well-functioning, almost perfect economic model. Scholars opined that history had ended. “The Washington Consensus,” the dogma of free markets, deregulation and balanced budgets at any cost, was force-fed to the world.
“But then came the economic crisis of 2008 and 2009, and it became clear that the new Western model was an illusion that benefited chiefly the very rich. Statistics show that the poor and the middle class saw little or no benefit from the economic growth of the past decades.
“The current global crisis demonstrates that the leaders of major powers, particularly the United States, had missed the signals that called for a perestroika. The result is a crisis that is not just financial and economic. It is political, too.
“The model that emerged during the final decades of the 20th Century has turned out to be unsustainable. It was based on a drive for super-profits and hyper-consumption for a few, on unrestrained exploitation of resources and on social and environmental irresponsibility.”
I don’t know of many who could say it better. I was in Moscow as a journalist during the Gorbachev era and then during Yeltsin. With Gorby, there was a great excitement, sort of like the mood in the U.S. in the 1960s when a number of big revolutions were underway, notably in race relations, sex roles and economic inequality. Gorbachev was much loved but when fast-paced history overtook events and the USSR fell apart in December 1991, there was an orgy of self congratulation in the West. Many, my New York-based editors included, said it was the triumph of Reagan-Thatcher free market policies, which, we now know, gives far too much credit to both conservative leaders.
When I returned to my Moscow post in 1993, I naturally couldn’t believe the changes. The KGB didn’t follow me around, they were working at private security at upscale grocery stores and came up to say hello, knowing me by name and asking how it was to be back. Along showcase streets once tightly controlled to let the Zil limos of the Party bosses race past, there were occasional mob shootouts.
But perhaps the most stunning change was how the U.S. Embassy no longer seemed very important. The sources you absolutely needed to have were at the International Monetary Fund.
The West, lead by George H.W. Bush and then by Bill Clinton, pretty much handed over running policies for the New Russia to the bureaucrats of the IMF, who, of course, were pushing the standard medicine of free markets trump all everywhere. Moscow had better balance its budget, get control of its money supply, end government services and get with the program if it were to get its next tranche of $4 billion in aid.
I’ll never forget what one Russian official, an old friend, warned me about. He was a little older than I and had been a Party apparatchik helping run a tractor factory. He was a pretty bright guy, ended up getting an MBA from Harvard and came back and took over the tractor factory in an LBO in the new privatization world. He was very worried saying that the West just didn’t get it. All the social services provided by the state, cradle to grave coverage of medicine, schools, vacations and funerals, went through the factories. After privatization, the social services were the first to be cut. Nothing was there to take its place. He said this was foolhardy, no matter what bullshit the IMF was pushing. The Chinese weren’t doing it this way and were a lot more successful.
And guess what? He was right. That’s one reason we have Putin and his shadow government of siloviki or power players today.
Gorbachev is dead on right about our need to rethink and restructure. We really need to stop thinking that the “free market” can solve all problems. Our supposedly wonderful economic model really only benefited the very rich. But today, everyone is paying the price for mindlessly following the ideas of laissez-faire conservatives.
So, let’s chuck the absolutist dogma of free markets, and, as Roy Medvedev would say, “Let History Judge.”
Peter Galuszka

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12 responses to “Free Markets Forever? Let History Judge”

  1. E M Risse Avatar
    E M Risse

    Peter:

    Saw the item by Gorby and glad you called it to BR reader’s attention.

    Good perspectives – your’s and Gorby’s.

    The Gorby original is worthy of a careful read, especially what needs to be done and who else has at least started.

    Gorby’s phrase is “hyper-consumption” rather than Mass OverConsumption but he means the same thing.

    EMR always thought “Perestroika” was Russian for “Fundamental Transformation” but Gorby says it is “cardinal change”– that is close.

    By the way the same issue of WaPo has a review of “Busted.” Congrats again, you were one of the bloggers who jumped all over Ed Andrews early.

    The Singletary review is worth reading, especially for those who never got past the suggestive photo you posted.

    Also in WaPo is a review of “The Myth of the Rational Market” by Justin Fox. Roger Lowenstein’s review goes well with the Gorby item.

    EMR

  2. Larry G Avatar
    Larry G

    I think if we did not learn anything else from the events of the last two years, we learned that the idea that what is good for business is good for the rest of us is baloney.

    The Private sector is more efficient than the government when it comes to maximizing it's profits – at least the better companies are but you need to look no further than the current private sector health care system to see just how inefficient and unresponsive it is to the needs of the citizens.

    What companies are pursuing is what is in the best interests of their owners and their investors – and that is not necessarily what is in the best interests of the country – nor is it particularily efficient as an economic activity.

    Don't get me wrong, I'm not necessarily defending the government here but private industry basically sells what will sell no matter whether it makes sense as beneficial to citizens.

    look no further than cigarettes or big macs to know that what is "good" for business has no relationship at all to what is good for people.

    If business had their way… they'd not be responsible at all for making sure that poisonous food did not get sold or other unsafe products to market.

    We do have a model for less regulation and more free markets; they're called third-world countries.

  3. David Avatar

    OMG, if any of you actually think we have a "free market" economy, or have ever had anything close to one, I want some of what you're smoking.

  4. Anonymous Avatar
    Anonymous

    David and Larry are right.

    If you think government is expensive, just try a free market economy.

    Total Cost = Production Cost + Externalities Cost + Regulation Cost

    RH

  5. Larry G Avatar
    Larry G

    well I never thought that we actually had a true free market economy to begin with and that there were good reasons why we did not, not the least of which is the pros/cons of whether or not we had adequate regulation with the sub-prime/CDOs, etc.

    It's a little hard to believe that the staunchest of the free market folks are blaming this on a Congressman.. in the minority party… who "told" the mortgage companies to make loans to folks without verified income and assets – so-called liar loans.

    and of course.. in order for this to be true, we'd also have to believe that Standard & Poors and the other rating agencies were likewise "told" to put a AAA rating on those bundled securities.

    Nope.. the truth is.. that an unregulated … or ineffectively regulation market can – and win – bring an entire economy to it's knees if you let them.

  6. Anonymous Avatar
    Anonymous

    There is certainly more to the sub-prime crash than the CRA, but that law certainly caused or, at least, provided strong incentives for loans to be made to people who could not reasonably be expected to afford them.

    In a totally unregulated market, those loans would not likely have been made. I'm not arguing that there should be no regulation of the financial markets (there should and, in fact, the feds should place stronger regulations on commodities trading and other forms of gambling), but much of the cause of the sub-prime crash stems from government regulation and not non-regulation.

    I think we need to be more precise in our discussion of regulation and free markets.

    TMT

  7. Larry G Avatar
    Larry G

    I don't think the government can "force" any company to make a loan.

    Look at the nitty gritty of the subsequent financial meltdown when no companies were loaning money at all – the credit crunch.

    Now if the Govt could force them to make loans for homes then why couldn't they force them to make loans for other purposes?

    the whole reason for the TARP stuff was an attempt to free up the credit lock-down.. right?

    or am I misunderstanding your point TMT?

  8. Anonymous Avatar
    Anonymous

    Larry, the feds effectively force banks, etc, to make loans to satisfy their obligations under the CRA in order to obtain unrelated regulatory approvals. Either that or the bankers I've worked with are lying. It's regulatory blackmail.

    Certainly some of those loans would not be made under normal circumstances. That's government intervention or regulation.

    Now,I would never claim that the CRA was the sole cause of the sub-prime meltdown, but it was a cause. And it was not a free-market cause. That's my only point.

    TMT

  9. Larry G Avatar
    Larry G

    Okay.. I see the point.

    but I just don't buy the concept.

    I think the mortgage companies used the CRA and the repeal of the glass-stegall act to make pots of money on mortgage fees.

    The CRA law was about "redlinning" – about the refusal to grant credit to QUALIFIED buyers in geographic areas that had been "redlinned" by the industry.

    The law never said: "make loans to unqualified buyers".

    And who told Standard and Poors to rate these mortgage securities AAA?

    do the government tell Standard and Poors to put that rating on mortgage securities based on borrowers with no verified income or assets?

    I think – the govt was "used" as an excuse to engage in speculation .. rather than regulation that forced the loans.

    Has that law been repealed?

    nope.

    so why are the mortgage companies not still making those kinds of loans if the law is still in effect?

    TMT – I think you are being fed a myth designed to cover up the real culprits … here

    You should take a look at the 60 minute segment on this issue where they interviewed the folks doing the mortgages.

    No a single one said they were forced to do it and in fact one guy said: "On the other hand, no one was holding a gun to the heads of the folks getting the mortgages – either".

    Well – DUH -.. if you offer "free money" to buy a house to "flip" who would turn that down if they thought they could just buy and flip houses to make a living?

    The Mortgage Meltdown – to me – is a vivid example of what the private sector is capable of without EFFECTIVE regulation.

    to blame this on ineffective regulation is a stretch IMHO especially since the folks saying this are the same ones who are opposed to regulation to start with.

    They're not proposing "better", "smarter" regulation .. they're only affixing "blame" … which says a lot about their motives.

  10. Anonymous Avatar
    Anonymous

    "And who told Standard and Poors to rate these mortgage securities AAA?"

    Wait a minute. You had a security wahich was a basket of loans. Only a few of those loans were basically unsecured, at least for the securities rated AAA, and not all of them were.

    The thinking was that a few bad loans would not poison the whole security. But where it went south was that the securities themselves got redistributed and you could no longer discern what was in them.

    At that point fear took over, andeven though the security still had decent cash flow (95% of the underlying mortgaes were still paying) the security itself had no market value because no one would touch it. It was still an asset, but it was toxic.

    The ratings agencies were seriously culpable in all this, but there is plenty of blame to go around. Deming would instantly recognize it as a system failure not a failure with a single root cause.

    If we go looking for that we will be running incircles for decades.

    RH

  11. Anonymous Avatar
    Anonymous

    Today's example of free market at work has to do with the auto dealership franchises.

    Does the manufacturor have the right to simply eliminate a franchise, after the franchise holder has invested millions in property to support the manufacturors business?

    Or should the manufacturor be required to at least supply vehicles to the dealers, and let them succeed or fail?

    Given that a franchise is to be eliminated, how much does the manufacturor owe the dealer for his losses?

    The manufacturor is being propped up by the taxpayers on this, which includes the franchises themselves. Do they get cut loose without a fare thee well?

    —————————

    Obama is on a hard spot in this. Major lenders to the auto companies nclude the teaches pension funds, but the Obama administration has favored the union's position.

    RH

  12. Larry G Avatar
    Larry G

    when any business seeks financial assistance … public or private… then the folks giving the assistance.. have some say in decisions…

    in the case of the automakers, the govt was the rescue-entity of last choice.

    some would say that taxpayers have no business doing rescues to start with…

    on the rating agencies – I don't cut them any slack at all… their business is risk and they have been pretty ruthless on their ratings of other non-mortgage businesses and counties and states also.

    I still seriously doubt that the government was telling mortgage companies to make bad loans.

    "Congress passed the Act in 1977 to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining.[4][5] The Act requires the appropriate federal financial supervisory agencies to encourage regulated financial institutions to meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation."

    http://en.wikipedia.org/wiki/Community_Reinvestment_Act

    " The law, however, emphasizes that an institution's CRA activities should be undertaken in a safe and sound manner, and does not require institutions to make high-risk loans that may bring losses to the institution."

    not withstanding the facts.. there seems to be no shortage of folks that are opposed to regulation to start with… claiming that the CRA "forced" the loans.

    bullfeathers.

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