How the Financial Crisis Disproves the Free Market Theory

President Obama has been pushing for Wall Street reform for the last few weeks, with a lot of noise coming from across the aisle. The country is slowly pulling out of an incredibly steep economic nose-dive as we speak, and the goal is for that to never happen again. The whole concept of better Wall Street oversight horrifies those who believe in a free market. Let me take this opportunity to say, the free market is dead. Or at least it should be.

The idea of a free market lies deeply in the Conservative and Libertarian core.

"A free and competitive market allocates resources in the most
efficient manner. Each person has the right to offer goods and
services to others on the free market."

"We favor free-market banking, with unrestricted competition among banks and depository institutions of all types."

(Source: Libertarian Party. www.lp.org)

The quotes above come directly from the Libertarian Party's National Platform, under the category "Economic Liberty" and "Money and Financial Markets". This entire document is covered in idealistic language, which sounds fantastic on paper, but can hardly be applied to real life. For the libertarian stance to hold water in realism, "force and fraud must be banished from human relationships". That's another quote from the Libertarian Party's National Platform. Ideal, but not practical. The recent financial crisis has taught us that the free market model praised by Conservatives and Libertarians is toxic, and completely legal.

This American Life (www.thislife.org) has recently covered one of the most incredible aspects of this financial crisis in the episode "Inside Job" (Episode Stream). Along with a team from ProPublica (www.propublica.org), they explored how one hedge fund, Magnetar Capital, took advantage of all the perks of a free market. To make a very long story short, considering I could never tell it as well as it was told in this radio story, Magnetar Capital made part of a fortune ($1.7 Billion to $8 Billion in 3 years) by investing in purposely risky assets, and then betting on their inevitable failure. Much like insurance, Magnetar would make hundreds of millions of dollars when one of their toxic assets (which may have only cost them $10 million) went under. It's like buying a $100,000 home, placing a million-dollar insurance policy on it, lighting it on fire, and then claiming you had no idea how the fire could have happened.

This is one of the many schemes that bankrupted various financial institutions, and because of the bank bailouts approved under President Bush, the taxpayers were left with the bill. And again, this was completely legal, and done repeatedly.

"The world we seek to build is one where individuals are free to
follow their own dreams in their own ways, without interference from
government or any authoritarian power."

Above is another excerpt from the Libertarian Party's National Platform. Magnetar followed its dream in its own way, and there was certainly no interference from government. The only feasible guideline in a free market is competition, but in situations like this one, competition is not even a factor. There's such deep consumer dependency in the financial sector, and so many of the sector's actions take place in the dark, away from public view and through government loop holes, that competition can't even touch these organizations. The Financial Sector was given a free market for long enough, and they haven shown us what they did with it, and now it's time we take it away from them.

Thanks to This American Life and ProPublica for this incredible story. If you'd like to listen to the This American Life episode, click here. And if you're a fan of Broadway musicals and corrupt Wall Street firms, I highly recommend the video below.

Bet Against the American Dream from Alexander Hotz on Vimeo.