Bob Sommer: What Free Market?

A BUZZFLASH GUEST CONTRIBUTION
by Bob Sommer

On Monday night this week, Dow Jones futures were down over 550 points. The NASDAQ was down 100. The Hong Kong market had plunged over 2,000 points, and that was a day after losing almost 1,400! Throughout Asia on Sunday and Monday nights, markets were sinking -- fast. Japan was down nearly 4% on Sunday and then 5.6% on Monday. A red tsunami engulfed Asian trading floors and swept across Europe.

But ... not to worry here at home! An hour before U.S. markets opened on Tuesday, the first business day following the Martin Luther King, Jr., holiday, the Federal Open Market Committee (FOMC) announced it was lowering the benchmark Fed Funds rate by .75% to 3.5%.

Dramatic stuff -- the biggest rate cut in decades! The first time the Fed had lowered rates between meetings since 9/11. And it came without warning.

CNBC commentators sputtered, but the drama wasn't done.

Within 30 minutes of the FOMC's announcement, President Bush announced that his stimulus package to save the floundering U.S. economy from recession might be more extensive than the $150 billion he indicated last week.

Wait a minute! Hasn't he been telling us since the 2004 presidential campaign how strong the economy is, that the tax cuts are working, and (without calling it by its name) that trickle-down economics succeeded after all? Give the wealthy a tax break and everyone benefits, right?!

And didn't this all seem a little bit ... staged? The timing was downright Orwellian, and one had to wonder what the mission of the FOMC was these days. The Fed is supposed to rein in inflation and manage monetary policy to facilitate growth.

Indeed, according to the FOMC press release, "The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth."

Meanwhile White House press secretary Dana Perino reassuringly noted that "Americans should be confident that the long-term health of the American economy remains strong."

Really? Is the economy strong? Then why take action right then, at that very moment, 60 minutes before the New York Stock Exchange opened?

Wasn't this really just about the stock market losing over 500 points? About risk-free investing? After all, who would benefit from this move and its peculiar timing?

Not senior citizens, when they go to the bank to roll over the certificates of deposit that provide the interest income on which they live, only to find that CD rates are lower. Not home purchasers, for mortgage rates haven't come close to mirroring the decline of bank interest rates under Federal Reserve Chairman Ben Bernanke. Not anyone paying interest on a credit card, with rates virtually uncontained under the non-policies of this administration.

So who benefits?

The obvious answer is Wall Street, which was temporarily spared from a precipitous decline an hour before the markets opened in the U.S. like a condemned prisoner getting a stay of execution on the way to the gallows.

Ben Bernanke has assumed an unusual role as Fed chairman -- patron saint of Wall Street. His (and several other Committee members') statements in between FOMC meetings have seemed less geared to addressing the housing and sub-prime crisis than tempering financial markets, which have become exceptionally volatile over the past 10 or 12 months, as the depth of the crisis has been exposed.

But the threat of shaky sub-prime mortgages, the housing bubble, burgeoning debt, rising unemployment, and increasing commodity prices was obvious long before -- that is, years before -- either the FOMC or the White House were willing to admit there were any problems. Meanwhile, overseas markets carried the full risk of uncontrolled U.S. debt, fiscal mismanagement, and the cheap prices that underpaid and often oppressed foreign workers provided to U.S. consumers, while the FOMC consistently acted to save the day for Wall Street.

Risky business, indeed. What happened to the "free market," which everyone from CNBC's Larry Kudlow to conservative think tanks to Bush Administration advocates preach as if it were a religion rather than a flawed economic concept? With a truly free market, the Dow would have plunged on Tuesday. Indeed, we saw a glimpse of where it was headed in the opening minutes, as it fell over 450 points. But the close of -123 was considered by most a triumph of the bulls, a vindication of the FOMC.

Good, we might say. The Dow was saved. It didn't plunge. But this type of intervention just hides the true risks of the market and reduces liquidity. It's like heavy-duty cold medicines -- they don't cure the cold; they just mask the symptoms, and indeed may prolong the illness. Opportunity is supposed to exist on both sides of the market, not only the upside.

Mind you, I'm no free market advocate. Unlimited free markets, such as we're seeing on a global scale, are exacting an awful price on our environment, our economy, and potentially our way of life. Their toll is even higher in less- and un-regulated places such as China, Central America, and Southeast Asia. Many American consumers don't know or don't care that the cheap Christmas lights they bought at Wal-Mart or Lowe's might have been handmade by political prisoners in China.

It's hypocrisy to advocate a free market while at the same time goading and begging the Fed to intervene as stock prices fall, which is what Kudlow and others continually call for, and it's not only wrong but also dangerous for the Fed to base its actions on the movement of the stock market, which appears to be its guiding light since Ben Bernanke took over as Fed chairman.

There are good reasons for existing laws that punish private citizens and corporations for manipulating the markets. The Dow points saved today may be compounded many times over when we finally do see the real losses that were averted through these temporary salves.

A BUZZFLASH GUEST CONTRIBUTION

Bob Sommer worked in the financial services industry for 15 years. His novel, Where the Wind Blew, is forthcoming this spring.

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