How Not to Defend Free Markets
By Ayn Rand Institute: Yaron Brook (10/04/08)
Washington, D.C.--In response to the financial crisis, traditional defenders of free markets have criticized certain controls passed by U.S. regulatory agencies, but are not calling into question the legitimacy of the agencies themselves. But, argued Yaron Brook, executive director of the Ayn Rand Center for Individual Rights, “It is insufficient and indeed counterproductive to criticize a few failed policies of the Fed and the SEC, without challenging the existence of these market-dictating agencies in the first place.
“As Exhibit A, consider the response to the SEC’s recent war on short selling. The Wall Street Journal, regarded as a strong defender of free markets, wrote that ‘[T]he SEC first clamped down on so-called naked shorting--a reasonable move under any circumstances, even if there’s no evidence of widespread naked shorting of financial stocks in this panic. But Mr. Cox didn’t stop there. The SEC has also temporarily banned any short selling of hundreds of financial stocks, a list that has grown to include the likes of General Motors. Then, when the SEC was reminded that selling a stock short is a legitimate part of many unimpeachable hedging strategies, it relaxed the prohibition for certain types of sales while continuing to expand the list of “protected” stocks. . . . If the SEC wants to help restore calm, it would stop issuing new emergency rules in the dead of night and bring some transparency and calm to its own rule-making.’
“In praising some of the SEC’s actions, while criticizing others, the Wall Street Journal is conceding a disastrous principle: that financial markets should be controlled by government at all.
“Under capitalism, the proper role of the government in financial markets is to protect individual rights by banning force and rooting out fraud. This requires objective laws that do not permit would-be central planners to tinker with markets when they don’t like the results. But the SEC’s regulatory authority allows it to coercively prevent individuals from engaging in voluntary transactions like short selling whenever it decides those transactions do not serve the ‘public interest.’
“Since the ‘public interest’ is an indefinable standard compatible with any interpretation or rationalization, this means in practice that SEC goons can arbitrarily unleash their regulatory club on financial markets whenever they feel it’s warranted. For example, see Chris Cox’s blitzkrieg of contradictory emergency orders attacking short sellers.
“The basic principle behind regulation is that the government can use force, not to protect individual rights, but in an attempt to engineer ‘socially desirable’ outcomes, i.e., outcomes different from what would result from the voluntary choices of individuals on a free market. That is the same premise that underlies all disastrous attempts at central planning--from the Soviet Union to modern-day Venezuela.
“If the Wall Street Journal really wants to defend capitalism, this is the premise it must oppose. Instead of prodding government regulators to be better central planners, it should call for a complete end to government control of financial markets. This is the lesson all defenders of capitalism must learn: you cannot defend capitalism by conceding the legitimacy of its opposite.”
Yaron Brook is executive director of the Ayn Rand Center for Individual Rights.
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