There truly is no contradiction between regulation and free markets. Free markets require regulation to run efficiently.
Other industries form something called a “public trust.” That is, what they do is considered important or vital to society at large. For the privilege of being allowed to make tons of money doing business in “a public trust” a company has the responsibility not to fuck it up and to be subject to a much higher degree of scrutiny and regulation in order to ensure they don’t.
Life insurance is a classic example. If you want to take money from people in order to insure their lives you have to be able to prove to the government that you have the ability to pay their beneficiaries when they die. Also, you’re not allowed to do things that might fuck up your ability to do so. You have to be willing to subject yourself to the government’s standards and rules that make sure you won’t, and cooperate actively when they seek to verify this.
In spite of all this, a certain number of chuckleheads will still manage to fuck up and won’t be able to make good on their promises. Because of this, you need to be willing to take a portion of your profits and put them into a fund or funds that will make good on them anyway.
That’s the price of being in a public trust.
Being a financial service company like a bank, an insurance company, or a brokerage firm, or all three is also a public trust.
Now, we have two things going on in the current crisis. Personally, I don’t think any politicians are too blame. Private industry did this all by itself without any help.
The first thing that happened is that the financial services companies (including the rating agencies, especially those fuckers) broke the public trust. They did so by irresponsibly creating, disseminating and owning extremely risky securities in huge amounts simply because it was extremely profitable to do so. When these blew up they damaged themselves as well the public in innumerable ways. They didn’t do it on purpose, but they should have known better.
This made a bunch of the financial services companies sick. Bear Sterns died of this illness. Lehman Bros became gravely ill (but they were still sick from 1998, anyway.)
Lehman bros. did not die from this sickness, they were murdered. AIG did not die. They were murdered. Merrill was not dying, that was attempted homicide. Neither Goldman nor Morgan Stanley had more than mild indigestion yet there was attempted murder in the 1st degree against them, too.
The killers were short sellers. Oddly though, it’s not the short sellers fault. Think of them as sharks in the ocean. We may not like them or some off the things they do, but they serve a valuable purpose. Short sellers reveal weakness. They keep the markets efficient. They are not inherently bad guys.
The bad guys are the ratings companies. These companies accept money to rate the soundness of other companies and financial instruments. They fucked up big time with the CDOs slapping a triple A rating on just about anything because it was asset-backed.
They admitted that they fucked up, and that they were incompetant, and to fix it what they decided to do was not even try to do their job. They would just let the markets decide. If something went down they figured that would mean that there was something wrong with it and they should downgrade it.
Getting back to our shark metaphor, this was basically the same thing as loading a boat full of fish guts, driving the boat to a family beach where all kinds of nice people are swimming, and dumping the guts in the water.
The sharks came, as is their nature. They’re doing what they do, not their fault.
The shorts could now attack a company, knock it’s price down, force a downgrade which meant the company needed to produce more capitol as collaterol for its existing debt. This would make the stock go down further which would attract more shorts, etc etc, creating a death spiral.
The shorts could now create weakness rather than just exploit.
Something has to be done or the entire global financial system unwinds. It was very close. This was unprecedented.
Creating this scenario is a chain of stupidity, bad luck, greed, and more stupidity going back decades.
The government literally stepped in at the last minute. It could have been a disaster that would have made the great depression look like a cakewalk and it could have been global in scale.
In the very best case, it is still going to horrendous damage that will be felt for decades and will forever change the nature of financial services and securities markets.
They absolutely had to step in and bail it out and regulate it back to stability. I hope they can. Once that is done, absolutely, the players involved need to pick up the tab over the coming years and not stick the taxpayers, even if they are not directly responsible or are blameless. That’s the price of doing business in the public trust.