Are We Witnessing the End of Free Markets in U.S. Financial Markets?
Whether we're witnessing the end of free markets in U.S. financial markets is a subset of the more general question of whether the general economy will continue to operate with free - or relatively free - markets in the future. The subject has been and will continue to be discussed until the picture clears up in the coming months and years. But rather than simply let things evolve as they might, we need to recognize that all of us are being and will be affected. So it's probably a worthy subject for discussion on an occasional and ongoing basis. Let's take a first stab at it right now.
We can launch today's brief discussion from this Opinion published yesterday in the Wall Street Journal. An asset manager in New York expressed the view that markets have become less free since 2008, summarizing the reasons as follows:
For financial markets, growing erosion of the free market dynamic calls into question the entire "price discovery" mechanism that results with free markets. Prices once set by the laws of supply and demand may be more and more set by central authorities. In such a case, wouldn't our expectations of the effects of our asset allocation decisions have to change as well?
Right now we're witnessing the central authorities in China (government and central bank) ramp up their intervention in both the markets and the economy in response to an accelerating economic downturn. While such intervention isn't unusual, the degree to which the Chinese authorities are doing so sets a new standard. With repercussions consisting of spreading economic downturn being felt around the globe, one can expect countermeasures by other governments and their central banks. Any hope that the Fed might raise rates in order to "normalize" interest rates must be seen in this context. With the size and power of the Chinese economy putting on what is amounting to full court press, the rest of the world's economies can't simply stick with business as usual. A renewal of currency war as signaled by the devaluation of the Yuan on Tuesday may be merely a first step in the next phase of increasing attempts to control or even undermine free markets in order to short-circuit developing economic weakness across the globe.
For today, let's close with our author's assessment of what lies ahead for the U.S.:
We can launch today's brief discussion from this Opinion published yesterday in the Wall Street Journal. An asset manager in New York expressed the view that markets have become less free since 2008, summarizing the reasons as follows:
Unprecedented monetary easing, high public spending, repressive regulation and automatic debt forgiveness, while arguably useful in the midst of a severe crisis, cannot be sustainable remedies in the long term—that is unless one believes the world should do away with free-market principles altogether. Those who continue to advocate such measures, more than seven years after the global financial crisis blew up, should at least admit that what they really want is a profound and permanent change in the system.All this makes some sense, with one exception. We need to recognize that perhaps the crisis of 2008 never ended and - right or wrong - the authorities my be operating under the perception that an ongoing crisis needs these special measures. On the other hand, the author may be correct in assessing that at least some of those involved in proposing and continuing these policies do indeed want to foster fundamental change.
For financial markets, growing erosion of the free market dynamic calls into question the entire "price discovery" mechanism that results with free markets. Prices once set by the laws of supply and demand may be more and more set by central authorities. In such a case, wouldn't our expectations of the effects of our asset allocation decisions have to change as well?
Right now we're witnessing the central authorities in China (government and central bank) ramp up their intervention in both the markets and the economy in response to an accelerating economic downturn. While such intervention isn't unusual, the degree to which the Chinese authorities are doing so sets a new standard. With repercussions consisting of spreading economic downturn being felt around the globe, one can expect countermeasures by other governments and their central banks. Any hope that the Fed might raise rates in order to "normalize" interest rates must be seen in this context. With the size and power of the Chinese economy putting on what is amounting to full court press, the rest of the world's economies can't simply stick with business as usual. A renewal of currency war as signaled by the devaluation of the Yuan on Tuesday may be merely a first step in the next phase of increasing attempts to control or even undermine free markets in order to short-circuit developing economic weakness across the globe.
For today, let's close with our author's assessment of what lies ahead for the U.S.:
As far as the U.S. and its slow but steady drift away from market fundamentals is concerned, the Federal Reserve’s future interest-rate decisions and the coming presidential election will provide important clues as to where the nation, and its still unsteady economy, is headed.Looking through this lens, we're tempted to conclude that the free market's prospects in U.S financial markets, like the economy, must be considered, at best, unsteady.
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