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The World-Wide Undermining of Free Markets

The op-ed below by Romain Hatchuel, The World-Wide Undermining of Free Markets, published in last week’s Wall Street Journal is worth reading.  It echoes themes we discussed in our latest Quarterly Point of View, Undermined Incentive for Responsibility. The consequences of moral hazard risk are hard to quantify, but that does not make them any less real.  I have condensed the piece focusing on major points made, but here is the link to the entire opinion:

The World-Wide Undermining of Free Markets

August 10, 2015

Chinese authorities have gotten creative in their efforts to control the fall in the Shanghai and Shenzhen stock markets, which recently experienced their steepest one-day plunge in more than eight years. Prohibiting large shareholders and executives from selling their stocks, as announced last month, was a bold step, as was providing central-bank money to brokerage firms for equity purchases. Shutting down a large part of the markets was perhaps the most brazen move, as regulators allowed more than half of all listed companies to suspend trading in their shares.

It’s little surprise that Communist China would tamper with its own stock markets. Of more concern: Since the 2008 financial crisis, free-market principles in most developed markets, including the U.S. and Europe, have come under attack by governments and central banks bent on buoying asset prices and easing the pain of often necessary market discipline.

Since 2008 the Federal Reserve, the European Central Bank, the People’s Bank of China, the Bank of Japan and the Bank of England have all cut their interest rates drastically. While these lower rates have supported consumption, they have primarily benefited financial assets, which have rallied for six years with only rare corrections…. Governments increased public spending through fiscal stimulus plans, while central banks implemented aggressive quantitative-easing programs, which translated into colossal purchases of financial assets. Since 2008 the combined balance sheets of the world’s five leading central banks have increased by a staggering $9 trillion.

July’s near “Grexit” from the eurozone has revived the debate of austerity versus supposedly growth-friendly policies. Austerity-bashers have found in this latest episode of the Greek crisis new reasons to criticize the so-called troika of international creditors—the European Commission, the International Monetary Fund and the European Central Bank—and Germany in particular for its stance against providing more bailout funds to Greece without meaningful concessions.  Greece is depicted as an innocent victim of the eurozone’s economic and fiscal tyranny. So a country that has borrowed astronomical amounts of money, stubbornly resisted crucial reforms, repeatedly missed its budget-deficit targets, and likely manipulated its fiscal numbers is called a victim? A country that is now in the process of being bailed out for the third time in five years, a victim? Meanwhile, the coldhearted “austerians” aren’t only accused of being substantively wrong, but also of pursuing hidden or purely ideological agendas, such as slashing social programs or making the rich richer.

More people need to question the antiausterity camp’s real motives, which clearly stem from a distrust of markets. This is especially obvious when their attacks on fiscal discipline ignore the progress made by countries where austerity measures have been successfully implemented, such as the United Kingdom, Ireland or Portugal.

Do these fiscal doves care that much about unemployed Spaniards or Greek pensioners? Perhaps, but their ultimate goal, it seems, is to ensure that extraordinary postcrisis measures become permanent policy. Those who oppose this merely want a gradual return to normal fiscal and monetary policies. Austerity is just another word for free market, and the harsh debate around it is actually about whether the economy should operate freely again, or continue to drift toward a state-driven model.

Unprecedented monetary easing, high public spending, repressive regulation and automatic debt forgiveness, while arguably useful in the midst of a severe crisis, cannot be sustainable remedies in the long term—that is unless one believes the world should do away with free-market principles altogether. Those who continue to advocate such measures, more than seven years after the global financial crisis blew up, should at least admit that what they really want is a profound and permanent change in the system.

Maybe they know something I don’t, but it is fair to ask whether these extreme interventionist policies have become part of the problem rather than the solution, and if we shouldn’t instead revert to what remains the most successful economic system ever tried—the free market.

As far as the U.S. and its slow but steady drift away from market fundamentals is concerned, the Federal Reserve’s future interest-rate decisions and the coming presidential election will provide important clues as to where the nation, and its still unsteady economy, is headed.

Mr. Hatchuel is managing partner of Square Advisors LLC, a New York-based asset-management firm.


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