Australian Way of Life

Free Market Misunderstood

Written by
29 August 2013

This article from the Winter 2013 edition of the IPA Review is written by Researcher at the IPA, James Bolt.

If you only looked at the Occupy movement as a collection of angry, naive university students and yuppie bloggers, then you probably missed the true message of the movement. Don’t feel bad if you missed it, the recorded minutes of Occupy Melbourne show most of the protestors didn’t know the message themselves.

‘Most people lost money in the global financial crisis. Those people still have money. Therefore, they are selfish and evil’ was the tone of the movement. No one would argue that poor decisions by some banks contributed to the crisis, but to only look at their actions is to ignore the true cause—excessive government interference in the business world.

This is John A. Allison’s key argument in his book. Allison is overqualified to write on the crisis: He is the longest-serving CEO of a top 25 financial institution, having served as Chairman of BB&T for twenty years. Having retired in 2008, he is now the president and CEO of the influential US libertarian think tank, the Cato Institute.

Allison provides incisive and measured analysis of the reasons for this collapse, and provides his solution for it. In a refreshing change of pace from the current debate, his plan does not involve the US government becoming more involved in business, but a return to the free market system that made America great. Though the book dives deep into economic thought and analysis, it doesn’t require multiple economics degrees to understand. Without compromising his analysis, Allison’s writing ensures the content is accessible and informative to any reader.

The interference by the US government in the world of business guaranteed that, eventually, something had to give. The last three US presidents have the most dirt on their hands but the roots date back to President Lyndon Johnson’s ‘Big Society’. The free market was cast aside by these presidents, who opted to institute ‘crony capitalism’ (which Allison refers to as ‘crony socialism’) by financially supporting banks and other industries because they were ‘too big to fail’, rather than letting them fall because they were ‘too poorly managed to succeed’.

The presidents, Clinton in particular, also made banks give loans to people who would otherwise be turned away because they would struggle to repay, and continued the practice of stuffing the Federal Reserve with political appointees.

As Allison says, if banks believe the government will be there to support them if they make a wrong decision, they have no need to fear taking large risks with their business. Allison conveys many examples of rival CEOs who acted poorly with that exact belief in mind. But when many banks failed with the collapse of the real estate bubble, the government couldn’t save them anymore. And from there came the crisis.

The problem explained, Allison moves to the solution. This is not an academic concern—as Allison points out—the US government is on track for bankruptcy by 2025. To fix the mess, the government has to stop financially supporting private companies and over-interfering with business decisions through regulation (the total cost of federal government regulations in 2008 was $1.75 trillion), or another crisis will come. Allison knows that this will be a seismic shift in the business world and people may be hurt in the short term. But, as with business, we must value long term growth over the short.

This extends to allowing big banks to fail and not giving them taxpayer money so they can make the same mistakes. This means ensuring that important monetary decisions are not made by lifelong politically-charged bureaucrats by severely limiting the power of the Federal Reserve. And, as explained in one of the most interesting chapters in the book, we need to convey to future generations that making money for oneself is not evil, and that state-enforced altruism is not good. Then, we can move to recovery.

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James Bolt

James Bolt is a Research Fellow at the Institute of Public Affairs

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