Friday, April 20, 2012

Market fundamentalism

The free market has helped Hong Kong prosper, but it is also the cause of many of its problems today, including market dominance by a few firms in some industries (real estate, telephone, and autos come to mind) and polarization between rich and poor. Hong Kong has a number of very vocal economists who nevertheless continuously spout the Economics Party Line that government is bad and the free market is good.  A recent column in the SCMP is a good example; Tom Holland writes (17 April 2012) "Government is the cause of market failure, not its solution." In fairness, he was responding to a strikingly interventionist statement by the Chief Executive-elect C.Y. Leung. The new CE in waiting is reported to have said, "the government should intervene to prevent market failure and keep property prices at a level affordable to the public."  Holland argues that if we look at the recent housing crisis in the US, we see the opposite: "more often than not it's government interference that causes markets to fail."  Note the word "interference," which creates the illusion that the market is a natural thing, something that should not be tampered with.

He argues:

The popular narrative insists the crisis was caused by the excessive greed of investment bankers, abetted by hands-off politicians in thrall to Wall Street's financial donations.

It's a simple story, with easily identifiable villains. And it has an obvious solution: more government involvement in markets.
He then argues that in fact the cause is too much government interference, which he traces back to the Franklin administration's programs to encourage home ownership. And he explains the timing of the "take-off" in home values in 1995 to government programs intended to help minorities.
In 1995, Washington tweaked the Community Reinvestment Act to press banks into giving mortgages to borrowers from low income areas, threatening to penalise them if they failed to lend equally to ethnic minorities.
At the same time, government-sponsored enterprises like Fannie Mae and Freddie Mac were instructed to increase the proportion of their portfolios devoted to mortgage loans in poor neighbourhoods.
He recognizes that government programs were important to help minorities buy homes in poor neighborhoods, because banks thought they were less likely to repay loans. (He does not address the research that shows that this was not true, especially when class is factored out, meaning that these government programs were not taking on more risk but fixing a market malfunction due to racism.)  And then he says, "The intention was worthy enough: to make home ownership more affordable. But affordability was achieved only by abandoning credit standards as banks reduced the downpayments required on home purchases to zero."

He thus blames the "explosion of 'sub-prime' lending to borrowers who had no equity stakes in their homes and who were always likely to struggle to meet their debt service obligations."

So he blames the "sub-prime" crisis on political manipulation of the market to allow poor people to buy more house than they could afford, not on the bankers that gave people these loans.  He blames the crisis on government policies that promote home ownership, not on the securitization of real estate debt and the invention of CDOs and credit default swaps that became prominent in the 1990s.

Certainly, the problem is complex, and the factors he notes distorted the market. Most important, Fannie Mae and Freddie Mac spent huge amounts (and earned a lot of patronage money for their politically connected executives) to assure that they could do business.

But surely the big change in the 1990s was securitization; loans generated by one bank were sold on to other investors, so that the issuing bank no longer cared if the loan failed.  It is astonishing that economists like Holland refuse to see securitization without regulation as a problem. They define anything new and novel invented by the capitalist sector as "progress."  

I think an anthropological approach that sees these as cultural institutions that evolve and need to be maintained is more productive.

It is hard, sometimes, not to see economists as just the cheerleaders for the capitalist elite. They cling to their fundamentalist orthodoxy regardless of the facts. Though initially  Alan Greenspan said the housing crisis challenged his beliefs, even he has gotten back on message. The belief that free markets are natural and should be "left alone" is deep in economics. It is amazing that even the current crisis does not shake that belief. That is a sign of it being like a fundamentalist religion.

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