Washington DC, October 14, 2008 --  

The free market allows people to make the brilliant investments that drive the world economy, and sometimes make the stupid, hysteric decisions that have brought us to where we are today.

As left-wing observers gleefully declare that American-style unfettered capitalism is dead, defenders of the free market are in full retreat. The reason is clear to all. The stock market is down 36 percent in the past year¹, banks fail almost daily, Americans' retirement plans are in tatters, and there is ample talk of another Great Depression. It is hard to imagine a time when Americans could be less receptive to a defense of the free market.

And that's precisely why such a defense is so sorely needed. In times of crisis, the enemies of liberty regularly seize the opportunity to whittle away at our freedoms. "Temporary" remedies to a crisis often come at the expense of liberty, and these remedies typically remain in long after the crisis is gone. Consider that the emergency powers granted to security forces in the wake of September 11th are largely in place after seven years. Likewise, most of the market restrictions passed during the Great Depression are still in place more than 70 years on.

One of the government's Depression-era market interventions, Fannie Mae, was instrumental in the current economic crisis. The government-chartered corporation once bragged on television commercials that its business is "the American dream" of home ownership. And indeed, Fannie Mae and its sister institution Freddie Mac did make it far easier for banks to issue mortgages. In hindsight, way, way too many people were allowed to realize the dream of getting mortgages they simply couldn't afford. Had the government stayed out of the mortgage business, the crash of the housing market wouldn't be so severe.

Of course, all of the blame cannot be placed on Fannie Mae and Freddie Mac. On the government side, the Federal Reserve discouraged savings and helped build a credit bubble by keeping interest rates low. Congress and the President fueled unsustainable consumer and home spending through its own deficit spending. The government's deficit spending made people feel artificially rich -- entitlements and other funds poured cash into the economy without an equivalent level of taxes taking it out.

But the lion's share of the blame for the current crisis must not be placed on the government, but on individual Americans and the private sector. People should have known better than to buy homes they couldn't afford at inflated prices that seemed crazy compared with just a few years earlier. Lenders should have known better than to grant huge mortgages to poorer Americans with sketchy credit histories. And executives at Wall Street's investment banks certainly should have known better than to build their companies on the foundations of these shaky mortgage investments.

All these people made stupid, hysteric decisions, and the market is punishing them for their actions. But this is hardly evidence that the free market doesn't work – this is precisely how it works. The market rewards wise decisions with rising prices and -- every bit as importantly -- punishes foolish behavior with falling prices.

Problem is, people really, really hate to see prices fall and various groups refuse to leave the system alone. First, there are Wall Street types who normally laud capitalism, but now are begging for government bailouts from their own idiotic actions. Second are the average Americans, who don't give a flying fig about capitalism, but are willing to go along with any action they are told protects their money. Finally, there are left-leaning Americans, who always hated the free market, and can hardly contain their glee. These lefites have been quietly hiding in the shadows during the boom years, but are now seizing the opportunity to push America into a more European-style form of managed capitalism.

Moving to a highly regulated system of managed capitalism would be a terrible mistake. It may be hard to accept in today's market, but America's freer system is clearly superior. From 1973 to 2006, America's economy grew at an average annual rate of 3.1 percent, compared with 2.4 percent for France and 2.1 percent for Germany.² The freer American system begets more innovation and higher productivity, but as is now abundantly clear, comes with the risk of sharp downturns caused by mass stupidity.

Those who seek stability by outlawing stupidity will end up outlawing brilliance as well. The end result: mediocrity, slower economic growth, and an ultimately poorer America.

Related Web Columns:

Circling Sharks and the Magic Hand, September 30, 2008

Stagnation's New Decade, September 16, 2008

Yawning Toward Disaster, September 2, 2008

Tyranny of the Irresponsible, March 18, 2008

House of Cards
The Collapse of Credit-Driven Spending, March 18, 2008

Victimized by an Idiotic Mob, October 2, 2007

Spending Away the Dollar, December 7, 2004

The Crisis of Anti-Capitalism, September 8, 1998

Notes:

1. Google Finance, S&P 500 1 Year, October 14, 2008

2. UnData Database, GDP Annual Rate of Growth (World Bank estimates), October 2008