Thursday, September 25, 2008

What Fannie Mae and Freddie Mac Tell Us About Free Markets

What Fannie Mae and Freddie Mac Tell Us About Free Markets

The Treasury and Federal Reserve plan to save teetering Fannie Mae and Freddie Mac should lay one myth to rest: that perfect free markets exist or are even desirable.

Conservatives argue that free markets are the solution to crises ranging from inadequate health care coverage and the looming insolvency of the social security system to the current housing-sparked financial mess. Listening to them, it's easy to forget that a market is a means, not an end, and that regulation and government in general are not inherently bad.

Many business executives don't really want a truly free, transparent market--for understandable reasons. As any economist will tell you, companies make a heck of a lot more money when information asymmetries and inefficiencies exist. Over the years, plenty of executives who described themselves as free marketers have happily accepted help from Washington when their companies or industries ran into trouble.

Societies elevate certain values and aspirations to the status of universal rights. In the United States, these include freedom from discrimination, a decent education, a chance to own a home, retiring with some measure of security, and now access to affordable, high-quality health care.

Markets should be structured and governed to ensure that these universal rights take precedence over special interests, including business. And when the potential profits are insufficient to generate the private investment required to achieve society's goals, yes, there's a role for taxes.

Especially in this election year, now is a good time for Americans to clarify their values and aspirations as a society and to reconsider the best means for realizing them.

For example, it seems that the vast majority of Americans want universal health care coverage that's affordable, easy to use, and offers an abundance of choice and competition. Is employer-sponsored health care--an accident of history that serves barely half the population in some states and puts many U.S. industries at a competitive disadvantage--worth preserving?

Similarly, our goal is to make home ownership affordable and safe for the many and is not to turn homes into commodities that can be traded like pork-belly futures, right? If so, is the best means of financing home ownership opaque markets anchored by the likes of Fannie Mae and Freddie Mac--private companies whose executives and shareholders reaped handsome returns while taxpayers assumed the lion's share of the risks?

As we move ahead to claim our universal rights, let's remember that markets are a means, not an end, and that we can and should shape them to do our bidding.

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