Resurrecting the free market

The Baltimore Sun

Are we witnessing the end of capitalism? That's what you might think, based on the many voices now questioning the continued viability of the free market model that has provided our country with such abundance for well over two centuries. The strongest condemnations have concerned the unprecedented intrusiveness of the federal government's new role in the private sector and the ruinous dollar amount of the bailout package.

These are legitimate concerns, but such criticisms must eventually give way to discussion about our path forward. Despite the challenges, I believe we can recover the full dynamism and creativity of our capitalist economic model, but some definite steps are needed. I suggest three in particular.

First, in the initial weeks of the next administration, federal financial officials must announce a clear plan for divestiture of the government's newly acquired stakes in formerly private companies. The time frame matters significantly less than does the stated intention to return the wounded into the wild eventually. As with the Federal Reserve's Treasury auctions, all qualified buyers, domestic and foreign, should be invited to bid on these assets in order for the government to obtain the best possible prices for its holdings. Most important is to send a clear message that no "United States Holding Company" will co-exist with and compete with the private market permanently.

I liken this encroachment of the federal government into the private realm to the occupation of a conquered nation. Gen. Douglas MacArthur, in overseeing the occupation of postwar Japan, made clear that he considered the occupation a success only if it were completed within a few years. Any longer and his occupying force would become a colonizing force. We must not permit that to happen with the federal role in the financial marketplace; the necessary government role of regulation in the capital markets cannot devolve into paternalism without eroding the dynamism of American business.

Second, for their own benefit, publicly traded companies must address one crucial failing that contributed to our current muddle: the utter inadequacy of accountability to shareholders in our corporate model. The annual shareholder meeting simply does not accomplish this. Those were held quite recently before the blowups of Bear Stearns, Lehman Brothers, AIG, etc. What is needed is a full-time office addressing issues of shareholder advocacy: an independent inspector general to be elected by direct shareholder vote and empowered to investigate every manner of suspected malfeasance, especially at the highest level. This office must report not to the chairman but to the independent directors of the company, who must then be separately empowered to remove anyone, including the chairman. The inspector general would not replicate the function of the audit committee, which must still monitor for adherence to company policy, but would instead focus on violations of fiduciary responsibility.

Finally, we must remember not to forget 2008. Capital market investors have notoriously short memories, and the immediate effects of the crisis will pass. In rather short order, our stock markets will move away from current problems and begin anticipating future growth prospects. This is commendable. But when that time arrives, we must not forget the crucial lesson of this year - that corporate governance, like a muscle, must be exercised or it will atrophy.

In 1962, Milton Friedman's seminal treatise, Capitalism and Freedom, laid out the case for capitalism as the operative expression of freedom in the economic realm and as a precondition for freedom overall. Recently, economic and political freedom in the United States took a step backward, but we can move forward once again. All it takes is for the federal cleanup crew to get out of the way once its work is done, and for the owners of capital to be more assertive in speaking up against excesses and abuses. Then the proven ingenuity, industriousness and resourcefulness of the American people will lead us back onto the path of prosperity.

Michael Justin Lee, financial markets expert in residence in the U.S. Department of Labor from 2003 to 2005, teaches at Loyola College's Sellinger School of Business and Management. His e-mail is

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