The Free Market Flaw And The Spaghetti Effect (Hal Cohen)

  Hal Cohen -- World News Trust

  March 22, 2009 -- I personally don’t like contortionists. I can appreciate the extent of their skill, flexibility and even artistry in a particular routine, but as someone who has difficulty touching his toes by simply bending over, there is something off-putting about a person who uses their toes to touch their ear. You might wonder what that has to do with free market economic theory. I claim it is the very basis of the mess we are in now.

  Most people are at least vaguely familiar with Adam Smith’s Invisible Hand and the Law of Supply and Demand. However, what has brought the global economy to its knees has been a contortion of economic instruments of Guinness Book of World Records proportions. One looks at the physical instrument and wonders how a knee can possibly appear where it does.

  Wall Street wizards managed not only to tie their financial bodies in knots, but to do so in a way that creates what I call the “Spaghetti Effect.” Think about a mortgage as an uncooked strand of spaghetti. At one end is the bank, and at the other is the borrower. The strand is straight and easily breakable under stress. Take a handful of this mortgage spaghetti and cook it. What happens is where we are today.

  The spaghetti has grown exponentially. What’s more, it has been twisted and mangled, bent and contorted. Say that some of this spaghetti turns out to be bad. When it was raw, it was easy to pick out the bad strands and not cook them. Now, however, they’ve been cooked and you cannot distinguish them from the good strands. Grab two random ends and you’d have better odds of hitting the lottery than picking ends from the same strand.

  So, the entire volume of spaghetti has increased. It looks good. The plate is full. But the increase in volume is really only water. You don’t have more spaghetti; it just looks like you do. What’s more, you’ve insured less than 3 percent of that spaghetti. Say 20 percent has gone bad. Now you are in the hole 17 percent that you don’t have just to satisfy the customers who ate bad spaghetti.

  The value of the other 80 percent of the spaghetti is now rapidly approaching zero because people aren’t buying it and the water is evaporating. The government comes in and buys much of that rotting spaghetti because there is way too much, and people need to eat.

  The people who bought the bad spaghetti to begin with are happy with this solution. They are made whole in spite of their bad decisions. Someone rationally proposes regulation to ensure that bad spaghetti doesn’t make it to market, and they howl. That would be Socialism! That would cripple the Free Market! This is said with a straight face as if the government buying up the bad spaghetti is not socialism.

  In the minds of these people the free market is the ultimate regulator. Evidence be damned! Whereas individuals may cheat the system (see welfare people driving Cadillac’s), Businesses cannot cheat. The free market prevents it. Here is their thinking in a nutshell, and pardon the pun.

  We recently had a catastrophic breakout of Salmonella involving peanut products. It involved fatalities. The Salmonella was traced to a plant in Georgia that had been inspected and received a superior rating for its sanitation. The inspector had no idea that peanuts could spread salmonella, and was an employee of the peanut industry.

  Free market doctrine tells us that a Peanut plant would voluntarily prevent salmonella because if word got out that people died from eating their product, they’d go out of business. Too bad, by the way, for the people who died before the market forces had the chance to do their magic.

  Imagine a football game without referees. One team has more money than another, and therefore has more cameras. On questionable calls they are better equipped to show or not the best angle on a replay. Another thing they could do is place pole under the field that would pop up slightly to trip the opponents at the right time. Hey, no regulation why not? The richest teams get to game the system.

  And that is the Free Market Flaw. People try to game the system. If you accept the premise that business doesn’t cheat, but people do, remember that business is run by people. Remember, too, that you cannot spell Business without BS. Regulation is necessary for the simple reason that a market that is not fair is by definition not free.

  Hal Cohen is editor and publisher of Mollynyc.com