“Markets are wise,” markets “are pregnant with information,” markets “are information personified,” “ignore market signals at your peril.” About what’s been written so far, the bet here is that no one who professes a free market lean would quibble with any of the aphorisms. It’s all basic stuff.
Which is why it’s so puzzling that accepted wisdom about markets goes out the window when financial institutions come into the picture. George W. Bush most famously (and intensely foolishly) asserted in 2008 that he believed in free markets, but that they weren’t working properly. Sorry, but markets just are. They have no ideology. They just reflect reality. Bush was the crisis back in 2008, and this is true no matter what free-market types tell you.
This is useful to bring up now in light of Wall Street Journal columnist Joseph Sternberg’s recent contention that those focused on banks in their search for the source of the next “financial meltdown” are whistling past the proverbial graveyard. Sternberg’s point is that per an IMF study, banks “represent a smaller portion of the global financial system than they did at the time of the 2008 panic and that proliferating nonbanks present a new array of financial dangers.” In other words, Sternberg envisions more “crises,” but not from stodgy banks.
About Sternberg’s assertion about shrinking banks, there’s no argument there. This argument was made in my 2016 book reviewed by Sternberg's late colleague George Melloan, Who Needs the Fed?. The Fed projects its vastly overstated influence through banks that shrink in relevance by the day.
Where Sternberg runs into trouble beyond his contradictory assertion that “low interest rates and quantitative easing distended global finance” (didn’t he just correctly write that banks are increasingly a non-factor in finance?) is in his argument that “proliferating nonbanks represent a new array of financial dangers.” Really? Why?
What about markets operating as markets could be so perilous? The question is not flippant, or maybe it is. Let’s call it flippant simply because those who wave the free market banner in the United States routinely finger a lack of market freedom as the source of the massive divide in living standards between the U.S. and most everyone else. We enjoy economic freedom that implies free markets, and we thrive because of it.
Except that in 2008 sunshine free market-type George W. listened closely to his hand-picked Fed Chair in Ben Bernanke. Bernanke told Bush, Nancy Pelosi, Henry Paulson and the rest that a failure to save banks like Citi (at the time a four-time bailout recipient) would result in the mother of all Great Depressions, one that would make the 1930s version appear tame by comparison. In fairness, Bernanke was a thoroughgoing Keynesian of the left until his overnight conversion to “Republican” in order to be tapped by Bush. Same flawed thinking, different letter next to his name.
Still, Sternberg is a man of the right. He writes for the Holy Grail of editorial pages, and the Bible of the right. Yet Sternberg believes that markets acting as markets and putting errant financial institutions out to pasture will bring on “financial meltdown.” Markets should be free, but not free in finance. Too dangerous. "Financial meltdown" dangerous. That seems to be the view of left and right.
Which is too bad. Precisely because finance is so important to progress, we must allow market forces to routinely reward the good and great while bankrupting the bad and mediocre. In short, the “panic” in 2008 was Bush, Bernanke, and Paulson, not market forces. Sorry, but markets are wise.