I’m astounded at how much really intelligent stuff is being written by people who are avowedly left-wing. For international-finance geeks, Brad Setser at CFR is a must-read, and Steven Waldman always has something thought-provoking. There are many others.
On the free-market side, most of what gets written is some variant of “Government is evil. Private actors may be anywhere from stupid to evil, but we prefer their stupidity and evil to government’s evil.” We already know that, so a lot of this material gets old pretty fast.
Finance commentators who are left-wing are generally unafraid to see that strict free-market outcomes aren’t necessarily for the good. They tend to be quite comfortable with exercising state power to constrain market behavior. On the right, people like me are generally very reluctant to embrace state power for two reasons: it leads to corruption; and it’s incredibly hard to get right.
I think the truth is somewhere in the middle. A strict, pure free market would allow any and all manner of financial arrangements among private parties. Although nothing remotely like this has ever existed in human history, I’m inclined to expect that such a state of nature would be fully self-policing. The key aspect of it that’s missing from today’s world is failure. Under strict free markets, you go out of business when you fail. You also risk failing when you do business with someone else who fails. And that induces everyone to carefully consider who they do business with and on what terms.
A very complex system has evolved for dealing with the consequences of free markets. Business failure isn’t always just. Think of Bear Stearns, which was fully solvent when rumors of its pending insolvency became self-fulfilling and destroyed a venerable firm in seven days flat. There’s a lot of structure in our legal system intended to prevent the full impact of free-market failures from hitting firms, stakeholders, and counter-parties under circumstances deemed less than fair.
But we may have taken this too far, into the realm of unwritten rules. Consider the discussion in regard to companies that are “too big to fail.” In these cases, agencies of government are entirely willing to expend enormous amounts of taxpayer money in order to prevent systemic disruptions due to business failures. The whole global financial system is now stabilized by government promises of this nature. Private actors no longer need to think very hard about doing business with weak counter-parties who bear the mark of “systemic importance” and for whom failure is (politically) not an option. Since this is quite unprecedented, we have no idea (yet) how brittle this environment is, or how susceptible to shocks like asset bubbles and their collapses.
The bottom line is we don’t have a free-market system. Such a thing is in fact quite impossible in practice, because of the ease with which powerful financial actors can influence and corrupt governments. Favored entities like Citigroup and Goldman Sachs will never be exposed to the full consequences of their actions, and will thus remain a permanent source of systemic risk.
To their immense credit, financial commentators on the left recognize what’s happening: huge amounts of taxpayer money are getting shoveled into the maws of politically-connected people and organizations who are rewarded for taking risks they would never take if they were fully exposed to the consequences of their practices. To oppose this is really a kind of populism (reminiscent of left-wing currents of the past, like the Free Silver movement), rather than the shibboleth of thoroughgoing state control (“socialism”) that is so feared on the Right.
I worry that those on the Right, with their emphasis on low regulation and fragmented government power, are enabling the Goldmans of the world to keep gaming the system in their favor. The proper alternative would not be a system of government control over the economy, but rather a system of strict financial regulation that makes it largely impossible for people to take risks with other people’s money.
How to do that without suffering the evil of government corruption, a risk that is underestimated on the Left? That’s another story.
