Given Alan Greenspan’s recent Congressional testimony, The Big Picture recently asked the following. Greenspan: Bad FOMC Chair, or the Worst FOMC chair?

A better question would be: Why do we need a Fed Chairman in the first place? People on the news keep pointing at free market policies in a market of money which is extremely far from free. How it is that we have a free market when money is sold by a government cartel?

The answer is that we don’t have a free market. In the U.S., free markets are unconstitutional. Alan Greenspan did not have free market policies. He had less regulated market policies which he named as free market policies. Less regulation in a mixed market is still not a free market.

When we give government the power to regulate we wipe out any chance for free markets. I recall reading a story a few years ago which illustrated this. It was a story about a piece of regulation called the American Disabilities Act (ADA).

Before the ADA there were several competing standards for accommodating disabled customers and employees. If you needed to build or refit facilities to accommodate the disabled you had to decide which standard you would follow.

The problem was that government had the power to regulate. At any time the government could step in and pass regulation which forced everyone onto the same standard. If your company chose the wrong standard, you might stand to lose a lot of money in compliance costs. So, you had two choices. Wait for government to create standard or influence government to use the standard you want to implement (or you could do both).

Just giving the government the power to regulate affects the market in ways we may not expect. It delays the actions of market place participants and may hurt the people needing the most help. It penalizes early adopters of standards. Small business has to sit on the sidelines while big business battles it out with government. With unlimited government the incentive for market participants is to wait for government to act.

With the free market the incentive for market participants is to act sooner than competitors. No one is waiting for government to act. Customer demand rules the day. Some participants will adopt poor standards and some no standard at all, but no one will be waiting for government to step in.

Digg!