What free markets?

Our July/August issue is (finally) going to press; here is the Editors’ Note for the issue:

The government’s response to the ongoing banking and credit crises is beginning to look like a massive redistribution of wealth from taxpayers and ordinary borrowers to the financial companies that got us into these crises in the first place—and to their executives, who profited handsomely along the way. It seems that policymakers and regulators are happy to take a hands-off approach to markets as long as stocks and other financial assets are appreciating—even if that appreciation walks, talks, and quacks like a bubble—but not when the stock market starts to go sour.

The bailout of Fannie Mae and Freddie Mac is a case in point. On the one hand, the government has to back the mortgage giants’ bonds, given the enormous number of mortgages they hold or guarantee (over $5 trillion), and given that investors in those bonds—including foreign central banks—have assumed that the government would guarantee them. Failure to honor the bonds would throw the U.S. housing finance system into chaos, hurting millions of families.

But as Dean Baker of the Center for Economic and Policy Research has pointed out, the Treasury Department has also effectively promised a potentially huge bailout of holders of Fannie and Freddie’s stock. That would be a bailout on an even larger scale than Bear-Stearns’s earlier this year. Unlike the guarantee of the companies’ bonds, this piece of the bailout is nothing more than a redistribution of wealth from taxpayers to shareholders who made risky investments.

While the government—the public—is bailing these companies out, how about some conditions? Maybe the public should get to own Fannie and Freddie, following the lead of the British government, which nationalized failing bank Northern Rock earlier this year. At the very least, caps on executive pay would be nice. David Mudd and Richard Syron, CEOs of Fannie and Freddie, made a combined $30 million in salary and other compensation last year.

The bailout of is part of the larger housing bill that also includes steps to address the foreclosure crisis. As Fred Moseley discusses in this issue, the bill’s foreclosure provisions in fact amount to a partial taxpayer bailout of mortgage lenders, since refinancing is initiated by lenders rather than borrowers, and the federal government will guarantee the new mortgages. This, when lending companies were the ones who lured people into risky mortgages in the first place. Moseley reviews policies to cope with foreclosures and sorts out which ones will truly help homeowners at risk.

Other issues in the headlines—food, oil—also expose the myth of the “free market.” The “fundamentals” of supply and demand have clearly played a central role in the precipitous rise in global food prices, but so has the rush of so-called index investors into new, unregulated “over-the-counter” markets for commodity futures. In the case of the oil industry, supply and demand have never been a free-market affair. In this issue we also examine two of the biggest winners in an economy rigged to redistribute wealth upwards: the managers of private equity firms and hedge funds. The regulatory and tax advantages lavished on our wealthiest citizens make clear that the government is active in the rigging.

Meanwhile, to read the editorial page of the Wall Street Journal, you’d think the big flow of money is from corporations into the public purse, as John Miller reveals in his critique of the Journal editors’ stance on auctioning, rather than giving away, carbon credits. Our question is: what planet are they on?

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