[THS] !!!! Paul Craig Roberts: Markets Fail When Humans Are Unregulated

[Peter Webster]

http://www.informationclearinghouse.info/article24600.htm

"The criminal record accumulated by the United States makes it the least
indispensable country on earth." 


Markets Fail When Humans Are Unregulated

By Paul Craig Roberts

February 06, 2010 "Information Clearing House" -- Former Federal Reserve chairman
Alan Greenspan answered that he had placed his trust in a flawed theory when he
was called before Congress to explain why he, Goldman Sachs Treasury Secretary
Robert Rubin and Deputy Treasury Secretary Larry Summers, prevented Brooksley
Born, head of the Commodity Futures Trading Corporation, a government regulatory
agency, from doing her job of regulating over-the-counter derivatives,

The efficient markets theory is that unregulated markets are efficient and rational.
According to this theory in which Greenspan placed his trust, unregulated markets
produce the best possible result. Any regulatory interference worsens the outcome.

Greenspan blamed his own bad judgment on a theory. The theory, or Greenspan’s
understanding of it, nevertheless still holds sway as Congress has proved impotent to
re-regulate the gambling casino that is Wall Street. Clearly, the theory serves
powerful interests.

But what is the truth?

The truth is that markets are a social institution. Their efficiency depends on the rules
that govern the behavior of people in markets. When free market economists talk
about markets deciding this or that, they are reifying a social institution and ascribing
to it decision-making power. Socialists make the same mistake when they blame
markets for the results of human action. But, of course, markets do not act or make
decisions. People act and make decisions, and markets reflect the decisions and
actions of people.

The entire debate over regulation is misconstrued. It is not the market, an efficient
social institution, that is regulated. What is regulated is the behavior of people in
markets. If you want good results from markets, good regulation of human behavior
is a requirement.

The market is like a computer. Garbage in, garbage out.

If people who use markets are not regulated, they issue fraudulent financial
instruments.

They leverage assets with absurd amounts of debt. They market their instruments
with fraudulent investment grade ratings. They deal themselves aces.

Did Greenspan not know this? Was he a victim of a theory or an enabler of greed
unleashed by the absence of regulation?

The way to bring socialists and capitalists together is to recognize that markets are
efficient and that self-interested human behavior requires social regulation.

The failure to regulate financial markets has produced enormous losses to all
Americans except the super-rich. But the U.S. government is guilty of an even
greater failure. Washington has not only permitted but also encouraged the
unemployment of its citizens by enabling greed-driven corporations to send American
jobs abroad in order to maximize profits for CEOs’ bonuses, shareholders, and Wall
Street.

As Ralph Gomory has made clear, economic theory has been shattered, because
there is no longer any connection between the profits of American companies and
the welfare of Americans. The profits of American companies are derived from the
cheap labor in offshored locations and are at the expense of the American work
force.

This dispossession of American labor has been heralded by offshoring’s pimps in the
major universities as “the New Economy.”

The “New Economy” is a hoax like most everything else the bought-and-paid-for-
media feeds to Americans. There is no new economy. There is an unemployed
economy. The headlined unemployment rate is just over 10 percent. The real
unemployment rate, as measured by the current methodology is 17 percent. The
unemployment rate as measured by the methodology of 1980 is 22 percent.

If jobs offshoring is a benefit to America, as the hired pimps of the transnational
corporations claim, why is more than one-fifth of the U.S. work force unemployed?
Why does the U.S. have the largest trade deficits in world history? Why is the U.S.
dollar losing value over time to other tradable currencies?

Greed and elected representatives, who are toadies to special interests, are
decimating the American economy.

Consider President Obama’s budgets for 2010 and 2011. The combined red ink is
$2.9 trillion. No one anywhere in the world has this kind of money to lend to
Washington. How will these massive deficits, never before experienced on earth, be
financed? They can only be financed by the Federal Reserve destroying its own
balance sheet by its purchase of toxic financial instruments from the banks thereby
providing the banks with cash with which to buy the Treasury’s bonds, or by the
Federal Reserve itself purchasing the Treasury’s bonds by creating new money, or by
another collapse in equity values that sends investors fleeing into “safe” Treasury
bonds.

American power is on the precipice, about to fall. Perhaps it is a good thing. The
world will be rid of bullying, of invasions of innocent countries based on blatant lies,
of torture and murder of woman and children, of redistribution of income from the
poor to the rich.

The criminal record accumulated by the United States makes it the least
indispensable country on earth.

Dr. Roberts was Assistant Secretary of the Treasury in the Reagan administration. His
latest book, How The Economy Was Lost, has just been published by
CounterPunch/AK Press.