Free markets allow bankruptcy

There is one fundamental misconception about the nature of self-correcting systems.

Nature is a self-correcting system. When there is a lot of rain on the savanna more grass grows. More grass means more food for more zebras. The zebra population increases providing more food for lions. The lion population increases and equilibrium returns. As rainfall varies from year to year it is totally normal for one extreme drought to come along every 10 or fifteen years. In these conditions, grass grows very little. Underfed zebras are weak and get killed at an alarming rate by the lions. A 90 percent loss in the zebra population is entirely possible. The self-correcting system then causes a good 90 percent loss in the lion population.

Free markets work in exactly the same way. There are boom and bust cycles, just like heavy rains and droughts in nature. Self-correction often means rampant bankruptcy. Sometimes it means the extinction of certain poorly adapted species. The financial crisis of 2008 in no way proves that markets do not correct themselves. They do. If world governments let all of the banks collapse, a new financial system would arise eventually, undoubtedly spearheaded by the few who made the best economic decisions in the years leading up to the crisis [these are the 10 percent of the best adapted zebras and lions]…

…but in our society, we are not willing to let 90 percent die off. We demand better than nature. We demand more than the self-correction mechanism. We want a system in which 90 percent of our citizens don’t have to go bankrupt, lose their homes, beg for money on the street, or prostitute themselves for pennies. We demand a system where we don’t lose every penny that we put in the bank just because the bank managers take on too much risk.

We like self-correcting systems in nature [in fact anytime that we are not the victims]. It is horribly painful for the zebra who is pinned down having his guts eaten by a lion. If zebras ran the planet they would undoubtedly try to tweak the system to reduce this phenomena to a minimum. Just as humans do whatever they can to prevent bank failures. Unresolved economic crisis leads directly to starvation. So remember that just a few short months ago, proud Republicans were still screaming how even more deregulation is needed. The Reagan Revolution has brought us a long way for sure. Throw a shoe at Dubya.