How Wall Street Broke the So-Called 'Free Market'

Andrew Leonard suggests that "free marketeers" along with their left-leaning counterparts not get too worked up over sovereign wealth funds flexing their economic/financial muscles as the US-led world financial systems continue to be stressed. After all, those now wielding financial power don't seem to have "our" best interests in mind either. And there is some reason to believe that sovereign wealth funds may help to counteract some of the excesses of greed and blundering that we have become accustomed to, particularly in organizations that appear "too big to fail." Here is a snip from Leonard's insightful commentary:

How Wall Street broke the free market, Andrew Leonard, Salon, Jan. 15:. Globalization, thy name is Wall Street bailout. There is no better demonstration of the new global financial order than the cavalcade of "sovereign wealth fund" white knights riding to the rescue of the world's name-brand investment banks all winter long. On Tuesday, Citigroup and Merrill Lynch both announced huge additional sales of stock to foreign buyers. Some observers are alarmed, fearing a parade of boogeymen out to do the West harm under cover of their aid drops. But they should take heart — the new players will be hard-pressed to do more damage than the old. …

Representatives of both the left and right are united on worrying about the national security implications of foreign government ownership of chunks (even if non-controlling) of key financial institutions. They can take some comfort, in the U.S., in the 2007 passage of the Foreign Investment and National Security Act, legislation spawned by the Dubai Ports World fiasco aimed at precisely this problem. But for some conservative commentators, the clash of civilizations isn't just about geopolitical control of crucial assets, but raises serious ideological questions that many thought had been decisively settled. Wringing their hands with a flutter bordering on hysterical, they worry that the influx of cash from national governments making decisions for strategic reasons, rather than purely economic, will upset the efficient workings of global markets. In Monday's Financial Times, Jeffrey Garten, a professor of international trade and finance at the Yale School of Management, is distraught.

Indeed the reality may be that the era of free markets unleashed by Margaret Thatcher and reinforced by Ronald Reagan in the 1980s is fading away. In place of deregulation and privatization are government efforts to reassert control over their economies and to use this to enhance their global influence. It is an ill wind that blows…

In the late 18th century, capitalism was replacing feudalism. In the 20th century, freer markets won the day. Now the world is flirting with another big transformation in the philosophy and rules of global commerce. Unlike the changes of the past, this new trajectory does not represent progress.

Perhaps it would be more accurate to say freer markets lost the day. The root of Wall Street's woes leads back directly to their own strategic missteps, greed, speculation-run-amok, and lack of appropriate supervision. The brightest minds in finance had exactly what they wanted, a playground where the monitors were looking the other way, and they blew it. When the China Investment Corp. pumps in $5 billion to Morgan Stanley, we are not witnessing the triumph of state capitalism, but rather, the embarrassing, humiliating failure of Reagan-Thatcher style unregulated capitalism. So now the U.S. buys Chinese toys at Wal-Mart, and China uses the resulting cash to buy American banks. Hey, anything's fair in love and war and free markets.

The magnitude of the disaster, from a free market apologist point of view, can hardly be overestimated. By abjectly failing to compensate or cushion the "losers" from globalization — whether by boosting safety nets, improving healthcare, or investing significant resources in education and training — the Bush administration guaranteed a growing groundswell of political opposition to global trade. And by failing to properly oversee financial markets, it provided an opportunity for foreign governments that may not share "American" values to become significant players in the heart of the global financial system. Talk about your legacies! The Bush administration not only may have crippled the Republican Party for a generation, but it also might have broken the free market! Whoops! …

The temptation, especially in an election year, to demonize the outsiders crashing Wall Street's party will be irresistible. But let's take a deep breath before we get too het up about foreign governments influencing the strategic decisions of Citigroup and Merrill Lynch and Morgan Stanley. Could they really manage to wreak more havoc than what the home-grown bumblers in charge of those institutions have already caused?