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he Power of Capitalism

By wmadministrator

Has the federal government gone too far and severely damaged America’s free-market economy by investing billions – perhaps trillions – of taxpayers’ dollars into banks, mortgage companies, Wall Street, and U.S. corporations?
Most taxpayers and many elected members of Congress have a very negative opinions about bailing out these major components of America’s economy.

Congress legislatively authorized Fannie Mae and Freddie Mac to dominate the mortgage-backed securities market and frivolously use the credit of the U.S. government to promote high-risk, sub-prime mortgages. And Congress failed to properly regulate the mortgage industry and permitted Fannie Mae and Freddie Mac, collectively, to become a monopoly too large to fail. The insolvency of these two institutions caused a worldwide tsunami of financial panic and is a likely cause of the current global economic decline.

Abuses in securities and the lack of competent regulatory enforcement by government agencies allowed Wall Street firms, banks and hedge funds to spiral out of control. The U.S. government’s failure to evaluate and regulate these financial institutions is gross malpractice and has already cost millions of investors to lose large portions of their savings, retirement funds and securities portfolios.

Bailing out auto companies seems to be a further denial of the free-market economy principles that made America great. Propping up a failing and mismanaged company is not an incentive for the company to reorganize its business operations for better quality, lower costs and higher competitiveness. Government bailouts also curb the development of new products and create a financial barrier for new and more competitive, start-up companies who may wish to enter the auto market.

What will the taxpayers learn from this experience?

• Government oversight of the mortgage-backed securities industry was gross mismanagement.
• Government’s poor regulation of financial entities did not protect investors or taxpayers.
• Government must get out of the bailout business as soon as possible.
• Government must protect investors and taxpayers by providing competent regulatory oversight, while allowing the free market system to set the value of property without government intervention.

To refresh our reader’s knowledge of economics, excerpts from Wikipedia’s definition of a free-marke are provided.

Free market
A free market is a market in which property rights are voluntarily exchanged at a price arranged completely by the mutual consent of sellers and buyers. Free markets contrast sharply with controlled markets or regulated markets, in which governments directly or indirectly regulate prices or supplies, which distorts market signals according to free market theory. In a free market, price is a result of a plethora of voluntary transactions, rather than political decree as in a controlled market. Through free competition between vendors for the provision of products and services, prices tend to decrease and quality tends to increase. A free market is not to be confused with a perfect market where individuals have perfect information and there is perfect competition.

Supply and demand
When demand exceeds supply, suppliers can raise the price. Consumers who can afford the higher prices may still buy, but others may forgo the purchase altogether, buy a similar item or shop elsewhere. As the price rises, suppliers may also choose to increase production. Or more suppliers may enter the business.

Economic equilibrium
The law of supply and demand predominates in the ideal free market, influencing prices toward an equilibrium that balances the demands for the products against the supplies. At these equilibrium prices, the market distributes the products to the purchasers according to each purchaser’s preference (or utility) for each product and within the relative limits of each buyer’s purchasing power.
Speculation bubbles and the type of herd behavior often observed in stock markets are quoted as real life examples of non-equilibrium price trends.

Laissez-faire economics
The necessary components for the functioning of an idealized free market include the complete absence of artificial price pressures from taxes, subsidies, tariffs or government regulation (other than protection from coercion and theft), and no government-granted monopolies like the U.S. Post Office, Amtrak, Fannie Mae, etc.

Low barriers to entry
A free market does not require the existence of competition, however it does require that there are no barriers to new market entrants. Hence, in the lack of coercive barriers it is generally understood that competition flourishes in a free market environment.

Centralized economies
Centralized economies, such as socialist/communist systems, suffer from an inability to gather all salient information, uncertainty in how to optimize with it, and unresponsiveness to changing conditions. Since economic output is divided equally among the entire population, individuals have little incentive to work harder or more efficiently than what is required to minimally comply with the economic plan. Individual input is decoupled from individual output.  The net effect is a sluggish, inefficient economy.
Source:  wikipedia.com

The most recent example of the free market in action is the decline in oil prices.  The oil cartel still does not understand that the decisions of billions of worldwide customers are powerful and able, one consumer at a time, to reduce the consumption of petroleum products. The decisions to reduce the demand for oil are broadbased and include alternative fuels, higher efficiencies, fuel additives, recycling and abstaining from use. Higher prices also motivate efforts for increased supply aided by greater capital investment, expanded exploration and production, enhanced technology and the desire to earn larger profits.
Remind your elected representatives that government control of the economy is not a sane substitute for a free economic system. Send your elected members of Congress a copy of the definition of a free market economy along with a letter asking for no more government intervention.