Another chip out of free markets

Those opposed to the war in Iraq oft decry the hundreds of billions of dollars that they see as being ill-spent in support of that conflict. Surely there are better things to spend that money on, they say. While this may be true, there are worse things as well. Witness the pledged bailout of mortgage giants Fannie Mae and Freddie Mac by our own federal government, to the tune of up to $200,000,000,000.

What characteristics does a company need to possess that allows it to be classified as "critical to the economy?" If anyone knows, please let me know. If I build a large company one day, I want to make sure I build it towards these characteristics.

Bear Stearns apparently possesses these characteristics, as the Federal Reserve deemed it "too important" an institution to allow to fail. This set up the Fed to arrange the dime-on-the-dollar purchase of Bear Stearns by JPMC.

I'm not an economist, nor do I pretend to be, on TV or in real life, so I won't even attempt to take on the myriad variables and considerations that have underpinned this move by the Fed. I am, however, a believer in free markets, who sees this form of life support for a failed company as being hazardous in the long term.

In the short term, the buyout of Fannie Mae and Freddie Mac may actually produce real benefits for the economy as well as for the consumer. It will return some level of confidence to the credit market and make money more freely available to borrowers.

In the long term, though, we may just be pumping artificial life into an already defunct carcass. And we all know what happens to dead things when we try to bring them back to life. Free markets are marked by the ups and downs that they produce. Companies and even whole industries die, which may produce temporary and sometimes deep ebbs in the economy. But then new ones are born which again send the economy marching upwards.

It's kind of like the first steps of sea turtles. I had the luck to witness this one night many years ago on Topsail Island, here in North Carolina. Dozens and dozens of these little hatchlings dug their way out of the sand and started flip-flopping towards the ocean. They'd get to the edge of the surf only to be sent backwards by an incoming wave. But they'd get up and go at it again. Two steps forward, one step back, two steps forward, one step back. Eventually they'd make it out into the deeper and calmer waters, where most of them would be eaten by predators...but that's for another analogy.

The economy's long-term progression is like those sea turtles (without the probable eventuality of being eaten by something bigger). It's progressive expansion occurs through repeated cycles of contraction and expansion. Sometimes the contractions are big and painful. By putting these companies on life support, we are not eliminating the painful large contraction that would result from years of unsound investments by these large banks, we are merely delaying it. As I heard Ron Paul say yesterday, we are just letting the bubble continue to grow. When it does pop, and it will (it has to), it will be much larger and more painful than if the government had not meddled.