The other day I had lunch with a colleague, something I do not usually do. In the course of the discussion, we had cause to discuss our fundamental beliefs about economics and the world. Imagine my surprise when he stated that the financial crisis demonstrated how free markets utterly fail and that without the government intervening, we would be much worse off today.
To which, with my clearer head I would now retort (note I say now, there is a reason I was not part of the debate team):
If your business did not serve its customers and investors well, and hence only survived 2008 due to a government bailout, how is that a sign that the free market failed? It would seem to me that the government stepping in prevented the free market from succeeding in punishing firms for not delivering value to consumers and investors.
I will not name specific names, though I do not believe, unlike him, that the entire financial sector would have failed sans government intervention. Those companies who had adequate capital and excellent underwriting would still have been hit, but not to the point of bankruptcy. And let's be honest - wouldn't you want to have a downturn cull out the weak companies with poor decision-making?
In other words, someone seems to have forgotten the notion that capitalism and free markets mean that not only are proper incentives there for success (the rewards of entrepreneurialism) but for failure too (less revenue, losses instead of profits, bankruptcy and insolvency instead of increasing wealth).
Or how about this - a centrally determined interest rate is central planning, not the free market.
Or how about this - the very size of the Federal Register is an indication that we do not have unfettered free markets, but a mixed economy.
To cast aspersions at the free market is rather misguided if we are in a mixed economy with growing government reach, potential violations of the rule of law by the institution that is supposed to uphold it, and increasing regulatory cost.
Whatever do they teach in schools these days?
To summarize, I am continually amazed by the notion that the last crisis demonstrated the failure of free markets. From my cynical view, it seems to demonstrate yet another government failure.