Free Market

[Trexman]

The free market needs government regulation. Not complete regulation, so that the company can't make decisions, but enough so that it doesn't engage in practices that hurt more people than it helps. Everytime something gets deregulated, it is always for the worse. When farmers are allowed to grow as much produce as they want, year after year, they drive the price of their crop down, and lose a bunch of money for themselves. Banks are not strickly regulated about the amount of loans they give out, and because of if you get situations like with AIG. If left to its own accord the free market will always pursue the business practice that makes the most money, and too often that business practice is at the expense of the people, so that the shareholders can benefit.

What are your thoughts?

 

[Souplex]

[Bad Russian accent] When the glorious socialist upheaval comes everything will be improved comrade! [/Bad Russian accent]

 

[grimsprice]

perhaps. however the bigger the government, the more taxes they have to collect to keep themselves alive. government is a ravenous beast. at what point is taking to much from people going to hurt an economy? look at America. all in all, we pay over half our earnings to the government. very few people here have money to spend. I think big government is bad for an economy.

 

[ben---neb]

The free market needs government regulation. SNIP

What are your thoughts?

It is often the case that what people call the Free Market is rarely free. In both your example you make that mistake (sorry but you do).

First one: Farmers produced too much thanks to subsidies from the government. In a free market the price mechanism ensures that such surpluses do not happen.

Bank one: Techincally with Central Banks (state run or devolved from the government) the financial industry is not an example of the Free Market. Indeed, it remains one of the few examples of a centrally planned market.

AIG happened because the Central bank set the interest rate below the natural (market, unhampered) level. Because of this banks found that previously unprofitable projects appeared profitable and lent out too much.

For more detailed (read: better) information on the current economic crisi pop along to http://mises.org/story/3128 A site devoted to the defence of the free market.

Always bare in mind that what would often appear to be free markets are rarely so. Indeed in my opinion what economies need is less (much less) regulation.

 

[Rolling Thunder]

Without regulation of free market, in particular the financial market, we wind up with much the same situation as we were in 6 months ago, with banks crumbling around us, unemployment soaring and DOOM being spelled out in the heavens. Simply put, an element of regulation is required to maintain the free market, and curb what can quickly become overenthusiastic spending or saving. The simplest means of doing so is the interest rate, which goes like so:

BoE: It would appear that consumers are spending too much to maintain the current upward trend in the market for much longer. If any more credit is acquired, we risk untoward instability and a possible recession. Let us raise the interest rate and taxes.

*Interest rate is raised*

Consumer: Oh, man, my credit card just became sooooo expensive. But, on the other hand, my savings became more profitable. Maybe I should spend less and save more?

*Consumer begins saving more*

(A few years later)

BoE: Gentlemen, it appears our steady raising of the interest rates has led to an overaccumulation of savings and, potentially, a paradox of thrift scenario. Already, businesses are finding it hard to acquire loans. Let us lower the interest rates.

*Consumers begin spending more and saving less*



So does the central bank regulate the economy.


Most other forms of government regulation, however, take the form of standards regulations - i.e. preventing harmful or dangerous materials from being sold to the consumer. In essence, what government regulation there is, is usually the result of harm being done to the consumer by unscrupulous members of the business community.

 

[Trexman]

First one: Farmers produced too much thanks to subsidies from the government. In a free market the price mechanism ensures that such surpluses do not happen.

the price of produce does not change untill after there is a surplus. When the Agricultural Adjustment Act was enacted it saved the wheat industry from collapse. It altered supply and demand so that the free market would reflect a fair price for farmers. The market reacted to the supply and demand set up by the government and not the supply and demand the market would typically reflect.

Bank one: Techincally with Central Banks (state run or devolved from the government) the financial industry is not an example of the Free Market. Indeed, it remains one of the few examples of a centrally planned market.

AIG happened because the Central bank set the interest rate below the natural (market, unhampered) level. Because of this banks found that previously unprofitable projects appeared profitable and lent out too much.

Banks had interest rates that were higher than usual. That is why so many people defaulted on the loans. They were lured in with initially low loans, but the interest rate was unfixed, so it would skyrocket to above 10%, often around 14%. Now, the people who could barely afford the loan in the first place can't afford it at all. This wouldn't be a big problem to the banks, except that they were giving out so many like this, they were losing much more money than they could afford to lose.

 

[ben---neb]

the price of produce does not change untill after there is a surplus. When the Agricultural Adjustment Act was enacted it saved the wheat industry from collapse. It altered supply and demand so that the free market would reflect a fair price for farmers. The market reacted to the supply and demand set up by the government and not the supply and demand the market would typically reflect.

There is no such thing as a "fair price for farmers". How would you even decide what price was "fair" and what wasn't? What you are talking about is removing the free market price mechanism due and replacing it with government controls. The EU did it through their Commom Agriculture Policy and the EU ended up with "butter mountains".

The AAA may have saved the US(?) wheat industry from collaspe but consider this: why should it have been saved? If they were making a lose it was because other famers elsewhere could do it cheaper. By "saving" the small minority that work in the wheat indursty the government has penilsed the vast majority who do not. They are peniled through higher prices for their wheat. The poor of America have to pay more for their basic foods thanks to the government paying farmers to stay in business instead of allowing the most efficient farmer to remain.

Banks had interest rates that were higher than usual. That is why so many people defaulted on the loans. They were lured in with initially low loans, but the interest rate was unfixed, so it would skyrocket to above 10%, often around 14%. Now, the people who could barely afford the loan in the first place can't afford it at all. This wouldn't be a big problem to the banks, except that they were giving out so many like this, they were losing much more money than they could afford to lose.

Yes and why did the people who could not afford the loan get it in the first place? Government intervention - Fannie Mai, Freddie Mac. The US government put pressure on the banking sector to lend to those on low incomes because it makes them look good.

The low interest rate set by the Central bank led to malinvestment into the sub prime markets, you are basically agreeing with me.

Interest rates went up because eventually all government intervention fails and the free market rules. Interest rates HAD to go up because banks were losing such much. Banks were losing so much because interest rates had been too low. If the government hadn't intervened in the FIRST place then this entire economic crisis could have been avoided. Follow the link I gave you, read, digest, ask, question ,learn, whatever.

 

[Trexman]

look at America. all in all, we pay over half our earnings to the government

Your taxes are not 50%. And the amount you have to pay because of the deficit will be about 1% of the income you make over the span of your entire life. what half are you talking about?

 

[Trexman]

The low interest rate set by the Central bank led to malinvestment into the sub prime markets, you are basically agreeing with me.

the central bank sets the interest rate when it lends money to banks and inerbank lending. When regular banks give out loans, they set the interest rate for the consumer to pay, and the interest rate that the regular banks pay to the FED for the money they borrowed is what is set. There isn't a regulation by the FED that a bank has to start out with a low interest rate and then raise it. the only interest rate that was defined, was the one the bank has to pay to the FED or whatever bank it borrowed the money from, This is the interest rate that the FED kept low, not the interest rate for consumer loans.

 

[velcthulhu]

"free market" is an economic policy in the same sense that "natural selection" is a health-care policy, except it's even stupider because businesses don't pass desirable traits on to their offspring. Regulation is necessary, because without it, businesses will do stupid things and screw lots of people over. It's not even true that businesses will always use the practices that make them the most money, because they're run by people, and people make mistakes. And when big businessmen make mistakes, lots of other people suffer for it.

 

[Akai Shizuku]

Free market economy relies on capitalism, capitalism relies on taking from the poor to give to the rich.

 

[ben---neb]

Free market economy relies on capitalism, capitalism relies on taking from the poor to give to the rich.

Wrong. Money flows from poor to rich (although more accuratly from the poor to business entrepenuers), yes but it flows back again from the rich to the poor. Take the following example: poor man buys some bread. Eventually his £1 ends up in the hands of the overall owner of the breadmaking business. He then uses that to spend himself, perhaps by expanding his business (obviosuly not just with the £1). He hires more people. Some of these people are poor. Hey presto.

Money flows around the economy all the time. Capitalism makes sure that resources are used most efficiently that means that consumers are getting the best quality product at the lowest possible price.

The reason why the poor in the Western world are not as poor as they were a hundred years ago is thanks to capitalism not socialism.

 

[Cpt. Red]

perhaps. however the bigger the government, the more taxes they have to collect to keep themselves alive. government is a ravenous beast. at what point is taking to much from people going to hurt an economy? look at America. all in all, we pay over half our earnings to the government. very few people here have money to spend. I think big government is bad for an economy.

I live in Sweden where the tax revenue as percent of GDP is 49.7%(2009) while in the US it is 28.2%(also 2009) so... Yhea...
Not that I am complaining about our taxes, becuase I'm really not, just stating a fact...

 

[grimsprice]

perhaps. however the bigger the government, the more taxes they have to collect to keep themselves alive. government is a ravenous beast. at what point is taking to much from people going to hurt an economy? look at America. all in all, we pay over half our earnings to the government. very few people here have money to spend. I think big government is bad for an economy.

I live in Sweden where the tax revenue as percent of GDP is 49.7%(2009) while in the US it is 28.2%(also 2009) so... Yhea...
Not that I am complaining about our taxes, becuase I'm really not, just stating a fact...

yeah our government gets around that pesky little number problem by putting a tax on EVERYTHING. you cannot spend money in any way or own anything without taxation. and all those little 8% purchasing taxes and registration taxes add up. trust me. i live here. you do not.

 

[Trexman]

yeah our government gets around that pesky little number problem by putting a tax on EVERYTHING. you cannot spend money in any way or own anything without taxation. and all those little 8% purchasing taxes and registration taxes add up. trust me. i live here. you do not.

An 8% sales tax means your paying 8% on all your purchases. That's it. All the money you spend for sales tax ads up to 8% of what you spend.

 

[Cpt. Red]

perhaps. however the bigger the government, the more taxes they have to collect to keep themselves alive. government is a ravenous beast. at what point is taking to much from people going to hurt an economy? look at America. all in all, we pay over half our earnings to the government. very few people here have money to spend. I think big government is bad for an economy.

I live in Sweden where the tax revenue as percent of GDP is 49.7%(2009) while in the US it is 28.2%(also 2009) so... Yhea...
Not that I am complaining about our taxes, becuase I'm really not, just stating a fact...

yeah our government gets around that pesky little number problem by putting a tax on EVERYTHING. you cannot spend money in any way or own anything without taxation. and all those little 8% purchasing taxes and registration taxes add up. trust me. i live here. you do not.

I think you missunderstand the meaning of "tax revenue as percent of GDP"... Also over here we have moms(basicly VAT) at 25% rate... Meaning if you buy something 25% of what you paid goes to the government... Although I have to note that there are some things witch have a lower rate(12%, 6% and 0%)...