Bailing out the free market – but was it really free to start with?

Posted on October 1, 2008. Filed under: economics, USA |

President George Bush refuses to be beaten. He will push for his bailout plan for the financial industry of the USA, and in an era of increasingly networked international finance, therefore for the financial industry of the whole world. 700 billion dollars of money is a lot of money. Why has the bailout amount to be this large? The answer is simple, this is the amount which simply did not exist in real economic terms – this was the monetary difference between reality and speculation – 700 billion dollars did not represent any real commodity, but a tentative value put on expectations of people. When there are no checks and balances on expectations, assessment of expectation in monetary terms can be quite tricky, and mostly imaginary.

The simplest check on such speculative assessment of expectations is supply of money to fuel such speculations. In the US economy for example, if the total money supply remained constant in real terms, or increases in money supply were proportionate to increases in commodity production at constant prices, any diversion of monetary funds into the housing market would have to have been balanced against lowering of prices of commodities or products not involved directly with housing. Since this did not happen, it meant that there was sufficient money to play around with over and above that could be balanced against the products of the US economy.  This could happen in only one of two ways.

The first possibility is an accumulation of unbalanced surplus money from within the US national economy in dollars, which would therefore implicate the US treasury and the government. The second possibility is that of an accumulation of surplus money provided to balance demand for dollar in the international economy, to either pay for speculations in globally “essential” commodities like oil, or to balance profits from pure speculation undertaken by managers of US capital in the global financial market.

This accumulation of unbalanced surplus money from within the US national economy is an important departure from “free-market” conditions, as in ideal free market conditions, even the supply of money would have been balanced by the net national or international income in real terms. At some stage US capital has indulged in speculative profiteering, either within its own national borders or internationally in exchanges with other national economies. Such exchanges can no longer be formally traced as mostly such exchanges would have been taking place through transnational entities, and there are few existing controls over the functioning of transnationals comparable to those that exist within national boundaries.

If US capital could make speculative profits not balanced against real production in the international markets, then it means that “free market” conditions were not existing in the international markets. This was to be expected because much of the post WWII world economy was under the shadow of the Bretton Woods regime, with the US dollar imposed as the monetary pivot. Many currencies in Asia or the Latin Americas, were pegged with the dollar or closely related and financially tied currencies in Europe, until the last decade of the 20th century long after the Bretton Woods regime was weakened and supplanted by monetary regimes aimed at facilitating transnationals.

If US capital could make speculative profits within its own national borders in “peculiar” commodities like land and housing, this also means that “free market” conditions did not exist within the US domestic economy. Essential commodities like housing maintain sustained demand in any economy, given non-decreasing populations, and can usually be balanced by provision of sufficient economic capabilities on the populations. The US has pretty strong anti-trust and pro-competition laws, but the scale and reach of these laws are not sufficient to cover the entire economy at all levels and at all scales. An excessive concentration of capital in the hands of the few implies indirectly manipulation of and departures from “free market” conditions even in the domestic economy. Such excessive concentration of capital would behave as excessive accumulation of a “commodity” in the hands of a few, raising speculative profits even on capital as a commodity.

Like many other countries, the US has to bring back competition and free market conditions even within its own boundaries, by raising the economic capabilities of all its people. This economic empowerment of its citizens entail wide ranging reforms in development, starting from education and healthcare to access to capital and rights to land or shelter – as only economic agents with sufficient power and resources to influence economic outcome can ensure the vitality and “free”dom of the market.


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