I was delighted to learn about the existence of a “free market” group in the country, especially that it seemed to have several prominent members.
But when I read further and saw that the same group acclaimed or endorsed the leadership of the local central bank for “steering” the economy and for producing “low inflation”—my enthusiasm faded. I got turned off and dismayed.
Suggesting that central banks can “steer” the economy essentially destroys the free market principle. Doing so suggests that socialism is superior to the free markets. If central banks can steer the economy, then why the heck bloviate about free markets at all?
There are many aspects to quibble with central bank operations, but the most important facet is the manipulation of interest rates.
Tinkering with interest rates represents a form of price control that causes price distortions which subsequently produces bubble cycles. In addition, maneuvering interest rates impels for indirect redistribution: from savers and creditors to debtors.
So essentially a central bank that dabbles with interest rates does this to promote the local banking cartel, (banks are financial intermediaries so lowering of interest rates attracts borrowers or clients for the industry) at the expense of the other industries and the consumers.
So what’s the essence of free market here? What you have instead is a banking cartel buttressed by state capitalism that essentially privatizes profits and socializes losses. (You will see this when a crisis surfaces)
As for low inflation, policies have intertemporal effects. Previous low interest regime was not due to central bank policies but due to many factors as globalization and technology aided productivity gains. Today’s rampaging food and energy prices are an offshoot to manipulated artificially suppressed interest rates, which promotes simulated unnatural demand, that will cause another global, if not, domestic crisis.
Thus, crediting central banks for current policies represents a naive and very narrow time oriented viewpoint.
It is of no wonder why free markets precepts in the Philippines have been denigrated.
They are founded on tenuous framework, which frequently gets obfuscated with the social democratic platforms.
In short, the free market principle is severely compromised and selectively and conveniently applied. This also means that the accommodation of the middle of the road policies such as the endorsement of central banking is a misguided way to promote free markets. It would seem like the devil who uses the Bible in order to mislead Christian devotees.
As the great Ludwig von Mises wrote,
The middle-of-the-road policy is not an economic system that can last. It is a method for the realization of socialism by installments.
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ReplyDeleteMG Thinkers also debated with FEF in 2004 on the VAT hike debate. They worked hard for its enactment into law with little conditionality, we suggested that unless there is drastic cut in income tax, anywhere from 0 to 15%, VAT shd not be increased. Of course the VAT hike groups won and so we have a highly distorted tax structure with high income tax and high consumption tax at the same time. Bureaucrats and politicians are happy, ordinary folks like fixed-income earners are not.
ReplyDeleteI believe we are in an epic transition from inefficient, highly restrictive systems to free market systems. And as long as we can imagine such a transition, we should know who are our enemies and who are our friends. Transitions of all sorts happen all the time, and a good example is the adoption of a new technology like cell phones in our daily lives. Imagine if the cell phone companies, in their desire to increase their market share, did not allow users to be called from or call to landlines. They could have reasoned that "landlines are our enemy, and we should not support landlines". Do you think cell phones would have garnered the same level of acceptance in the market had the cell phone companies introduced it without the ability to connect to landlines? As long as the old telephone systems serve their purpose, it is in the interest of proponents of new technologies such as cell phones and internet phones that the old system continue to function well. It is the same with Central Banks. Central Banks are not bad per se: in fact, for lack of alternatives, they continue to exist precisely because a functioning world market needs them. Of course, we need to watch that they be managed well. Governor Tetangco has certainly managed the Peso very well, and I am for retaining him.
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