Does Anyone Believe In The Free Market Any More?

Brad Delong, who obviously never sleeps and, therefore, makes it hard for the rest of us who do to keep up, has an interesting post from Dean Baker (follow the bouncing ball here) about how those who expouse free market capitalism whenever and however they can are getting on board the notion of a federal bailout for Wall Street and homeowners.

As I've said before, as soon as the Bear Sterns deal became acceptable, it was only a matter of time -- in this case, really only a matter of days -- before a homeowner bailout was discussed seriously. Yesterday, two days after the end of the Easter recess, Congress confirmed that when Senate Democratic Leader Harry Reid and Republican Leader Mitch McConnell agreed that a plan had to move forward. The resulting bi-partisan vote to consider specific plans was overwhelming.

The amount of money involved (supposedly around $30 billion but probably more by the time it's all over) is relatively small by federal budget standards. And if this is a one-time offer, it will be small.

But the principle will be huge. It should now be clear that "we" -- Wall Street, Washington, main street, individual investors, homeowners, lemonade stand operators, and whoever else you can think of -- are in favor of a free market as long as everything is going well. But if it's not, if housing prices are falling and interest rates rising; if you're losing money in the stock market; if you've made less than responsible choices as far as investing, spending, and borrowing are concerned, the U.S. political system now says that government intervention is acceptable.

This is hardly new, of course. The Chrysler, New York City, and savings and loan bailouts set the tone a while ago. And the federal government has almost routinely provided support for businesses and homeowners who located in flood or earthquake zones without having adequate (or in some cases, any) insurance.

The phrase we'll be hearing a great deal in the coming days is "systemic risk," that is, that Bear Sterns posed such a danger to the economy that there was no choice but to bail it out. Similarly, expect Congress to talk piously in coming days about the risk to the system of allowing foreclosures to take place at the levels that were projected. That's how the bailouts will be justified.

My understanding is that commercial real estate and credit card debt are the next shoes to drop in the current economic situation. That could mean that further bailouts are in the offing.