The Problem with Free Markets: They are Rigged

Simon Johnson observes regarding the LIBOR scandal:

In the aftermath of the Barclays rate-fixing scandal, the most surprising reaction has been from people in the financial sector who fully understand the awfulness of what has happened. Rather than seeing this as an issue of law and order, some well-informed people have been drawn toward arguments that excuse or justify the behavior of the Barclays employees.

The justifications offered include that this kind of cheating has long been done; that everyone does it; that “no one” get’s hurt; that the regulator’s should have caught them; and that it was only a very few basis points—a very small percent of a huge amount of money.

Medicynical Note:  This sounds vaguely similar to some of the arguments put forth for continuing and “freeing from regulation”  our non-system of health care.  It is posited that “free markets” without government regulation will magically contain costs and result in better outcomes.  Something that has not occurred anywhere in the world. 

It should be noted that we’ve seen how well deregulation worked in the 80’s with Reagan’s S&L disaster; in the 90’s with Enron’s manipulation of energy markets; in this past decade with the Bush/Greenspan collapse of the financial system and now with the LIBOR scandal. 

From these experiences, the long term effect of deregulation on complex markets would appear to be collusion and corruption.  The goal of which is to maximize short term profit (and incomes) of those involved.  Perhaps, that’s why the U.S.’s quasi free market of health care costs 1.5-2 times that of any other place in the world. 

Improved health is not the driving force of this system.   But rather the motivation is more revenue and profits  for suppliers, whether they are insurers, providers, pharmaceutical companies or developers of technology.  As with the LIBOR scandal, integrity and honesty (and improved quality, affordability, and access) is not their concern.

And as Simon Johnson noted:

Power corrupts, and financial market power has completely corrupted financial markets. Barclays and the other global mega-banks involved in fixing Libor have brought their own industry very low – completely destroying the legitimacy on which sensible financial intermediation needs to be based.