WaPo Editorial Board: Defender of Free-Market Capitalism

You have to give credit where credit is due. The lead editorial in the Oct. 20 Washington Post didn't declare free-market capitalism dead after the failure of several financial institutions led to massive government intervention - as a front-page story on its Oct. 10 edition declared. Instead, the editorial pointed out the how the market that failed wasn't exactly free to begin with.

"The deregulation of U.S. financial markets did not reflect only the narrow ideology of a particular party or administration," the editorial said. "And the problem with the U.S. economy, more than lack of regulation, has been government's failure to control systemic risks that government itself helped to create. We are not witnessing a crisis of the free market but a crisis of distorted markets."

As the editorial explained, the government was involved in the markets in many aspects because of actions by both Democratic and Republican politicians - not what Adam Smith had in mind when he outlined free-market capitalism in his writings.

"We'll never know how this newly liberated financial sector might have performed on a playing field designed by Adam Smith," the editorial said. "That's because government interventions of all kinds, from the defense budget to farm supports, shaped the business environment. No subsidy would prove more fateful than the massive federal commitment to residential real estate -- from the mortgage interest tax deduction to Fannie Mae and Freddie Mac to the Federal Reserve's low interest rates under Mr. Greenspan."

In the future, the Post editorial advised policymakers to be "more selective" when intervening in markets.

"Government must be more selective about manipulating markets; over the long term, business works best when it is subject to market discipline alone," the editorial said. "In those cases -- and there will and should be some -- in which government intervenes on behalf of social goals, its support must be counterbalanced with taxpayer protections and regulation. Government-sponsored, upside-only capitalism is the kind that's in crisis today, and we say: Good riddance."