"Free market" economist repents

http://www.nzherald.co.nz/politics/news/article.cfm?c_id=280&objectid=10676862

I feel like a priest who has been wrestling with his belief in god and has now decided god does not exist.

It's time for me to recant and to say what I've been thinking for months: the economic god of completely free markets and capital flows is not worth believing in anymore and we must look for other things to believe in and do.

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We should debate more specific controls on who owns what assets, whether monetary policy should still use the Official Cash Rate to focus on inflation alone, and whether banks should still be free to lend however much they want to whomever they want.

But first some background because this is not something that has come out of the blue. I've been thinking about this for a while.

'Mea culpa'

I used to believe in the primacy of markets and economic freedom.

I used to believe that New Zealand's interests, and the world's, were best served by completely free movement of capital and trade.

I railed against the tariffs and the exchange rate controls of the mercantilists and protectionists.

I argued in favour of unfettered free trade with China.

I despised the 'Think Big' policies of the Muldoon era and all the import licenses and exchange rate controls that went with them.

I believed the reforms of the late 1980s were ultimately good for New Zealand and if only we had gone a little bit further and a little bit faster we would have been OK.

I believed a free-floating exchange rate and the removal of tariffs and other trade barriers was a good idea. I believed in the law of comparative advantage and how encouraging companies to specialise the means of production in different countries ultimately made everyone wealthier

I'm not sure what he's repenting of, as there has been no such thing as completely free markets in the financial world for a long time.

It's time for me to recant and to say what I've been thinking for months: the economic god of completely free markets and capital flows is not worth believing in anymore and we must look for other things to believe in and do.

It is how the market regulations were manipulated or just bad regulations that got us into all the trouble we see. (That is not advocating completely free market on my part).

"These investment bankers exploited all sorts of holes in financial regulations"

What regulations? He asserted "We should debate more specific controls on... whether banks should still be free to lend however much they want to whomever they want."

When the governments of the world are constantly manipulating the medium of exchange, you don't have 'free markets'.

Hard money would do more than any government regulations (which will inevitably be bought and perverted) to control wildcat banking.

He _almost_ glimpses the problem:

"There are some short term fixes. One is to cut interest rates to zero and hold them there forever. America is trying that right now. The other is to try and win a race to the bottom in a game of competitive devaluations. In a way they are the same thing. America, Japan and Europe are all trying that right now.
All this specialisation and separation of production, saving, borrowing and consumption in different parts of the globe has done is make it more unstable."

It is the interest rate manipulation and currency manipulation that have created the instability. How much harder would it be for you to construct a building if each day the government could change the length of an inch? Money is how participants in the economy make measurements, government constantly trying to manipulate that measure foster mistakes and uncertainty.

Sure, some of the regs needed updating; but rather than doing that, we've been literally repealing the regulatory laws and rules for decades. The 2008 meltdown COULD NOT HAVE OCCURRED the way it did if we'd left Glass-Steagall in place, let alone if we'd expanded it to cover the new entities that had evolved. And even the shreds of the reg. system that were left were scarcely enforced, because the agencies were de-funded, under-staffed, and staffed with free market believers.

It does seems encouraging that he admits to have been "thinking" now and then.

Any mainstream economist who apostatizes from the dogmatic faith in the "free market" can expect to become a pariah among his colleagues in the academia, and among the business establishment they sequaciously serve.

... they have FAILED.