A response to an article in The Straits Times

I wrote an e-mail to the author of a straits times article:

Dear Hui Yee,

I refer to your article "When Free Markets Fail" on The Straits Times dated May 25, 2011. The article argues that free markets are not fail-safe, and active government intervention can forestall a global economic collapse.

In fact, from the Austrian School of Economics' point of view, it is totally the opposite.

The US hasn't had free markets for decades. How can one call the US a free market when the Federal Reserve is manipulating the interest rates, and the governments intervene whenever they have the chance to do so?

The 2007 sub-prime crisis has its roots in around 2000. Back then, the dot-com bubble has just burst, and President Bush and Greenspan, not wanting a recession which will cure the imbalances, injected tons of paper money into the system. Interest rates were lowered to 1%. The market is flooded with cheap money. The result is that people used this money for speculative purposes, such as the housing market. 

An economy can only be healthy if sound money is being used. And sound money means letting market forces determine the all-so-important interest rate. Sound money does not mean having a central bank and a small group of men trying to set interest rate for the whole economy.

Concurrently, Freddie and Fannie were created. These government organisations backed the mortgages. With these government guarantees, who wouldn't want a piece of the action in the housing market? 

Free market capitalism only works if greed is being balanced by fear. The government removes all these fear with those institutions that they created. Without these institutions, the population wouldn't have allowed such wild speculations to go on! The bankers won't dare to bet so heavily on housing. The depositors won't allow bankers to gamble with their money. But the government created this moral hazard, which effectively removes the natural checks and balances that the market provides. Nowadays, I bet people spend more time researching on the camera that they are buying, instead of the balance sheets of the banks that they are going to put their live savings in. Why? Because government guarantees the deposits. But where do government get their resources from? By printing money, in most cases.

I hope that some of these arguments can dispel the myth that free market has been at work in our world. We haven't have free markets at all - far from it.

Thank you for your time. I would be glad to get a reply from you.

Have a nice day.

Regards,

Jin