Your Basic Free Market Economics Quiz (Part 1)

How much do you know about free market economics? After reading the answers to the following quiz, you might be surprised at how simple the answers are to what you may have thought were complex economic questions. If the questions have heretofore seemed complicated, chances are that you've attended a government school for most of your life.

The major difference between the laws of economics and other natural laws is that government officials haven't yet bamboozled a large segment of American society into thinking that it's possible to violate the law of gravity.

1. True or False: The United States of America enjoys an economic free market?

Answer: False.

Although central planning has been discredited in the Soviet Union and many other countries, the United States economic market is still controlled by central planning. Rather than allow the market to regulate itself, the Federal Reserve controls the money supply and interest rates. As a result of such control, the USA cannot be considered to have a free market economy.

2. True or False: Free market deregulation is to blame for the current economic crisis?

Answer: False.

Contrary to what is conventionally spouted across the airwaves, the American economic market is very highly regulated by government. The primary way the government regulates the economy, as discussed in answer #1 above, is through the monopoly called the Federal Reserve. Other ways in which the market is highly regulated include the interventions of Fannie Mae and Freddie Mac, bailouts to friends of government officials, and stimulus packages to encourage further profligate spending among the United States populace.

3. True or False: Bailouts and stimulus packages will help cause a healthy economy?

Answer: False.

They will create just the opposite. Bailouts and economic stimuli simply prolong and increase the economic agony that will inexorably follow the inevitable failures of central planning. Bailouts are generally given to rich friends of government. Stimulus packages generally encourage more purchasing of items on credit by the general populace, rather than to encourage them to save a healthy amount of their income. Bailouts and stimulus packages do not bail the economy out of its malaise, nor do stimuluses stimulate it. During difficult economic times, we need neither.

4. True or False: Boom and bust cycles are a natural part of a free market economy?

Answer: False.

Booms and busts almost always occur in the presence of central economic planning. The Federal Reserve is not the first central bank that the United States has been plagued with. Other booms and busts have been related to previous central banks and their regulative mismanagement of the economy. If the United States government were to abolish the Federal Reserve, the likelihood of another boom/bust cycle would diminish dramatically.

5. True or False: A house is the best investment you can make? Houses never lose their value?

Answer: False and False.

After Japan's housing bubble burst, home prices plummeted by 80%. We should have seen it coming. Houses in the United States became vastly overvalued in the past ten years due to (1) artificially low interest rates kept in place by the Federal Reserve, (2) Fannie Mae and Freddie Mac purchasing up to 50% of United States home loans, freeing lenders to make more ill-advised loans, and (3) reduction of lending standards through faulty research that originally claimed that minorities were being unfairly rejected for mortgage loans, as well as through intimidation of banking institutions by groups such as ACORN, which resulted in large numbers of loans given to people who could not afford them. All of these problems and more made it appear to home builders that a far greater demand for homes existed than there really was.

. . .

As you noticed, the answer to each question in this quiz was "false". Hopefully by answering "false" to these and similar questions you will become more conditioned to spot the plethora of economic falsehoods that masquerade as truth in America. We've only scratched the surface. Stay tuned...




Comments

  1. i disagree with 2, 3, and 4. i'm with you on 1 and 5 (although you seem to imply that 1 is a bad thing).

    2 - the right kinds of deregulation, or lack of regulation did play a large role in our current situation (like banks not being able to take too large of risks then pass them off to someone else in a bundled security, and no freddie and fannie weren't the first or the biggest to do so). but while you're listing tangent regulations i think the speed limit and four way stops also may have had something to do with it.

    3 - yes, the bush stimulus did encourage credit spending, or even worse economically, savings, this current stimulus is designed not to do these. also, even if you're right about the rich friends of government part (which i in no way think you are), the free market gives to rich friends of corporations, how is that any better?

    4 - uh, you don't really answer this one other than saying the fed caused it!!!! well, i disagree, so i'm blaming sunspots. care to elaborate?

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  2. It was a true/false test? I answered "tax cuts for the rich" because I thought that was the answer to everything.

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  3. I think that #4 is a bit misleading. Even your own statements are that "booms and busts almost always occur in the presence of central economic planning" and that "if the United States government were to abolish the Federal Reserve, the likelihood of another boom/bust cycle would diminish dramatically."

    A true free market economy would not eliminate the possibility of booms and busts because while the invisible hand leads overall to positive outcomes that does not imply that every action in the absence of central planning is positive.

    On #5 you are absolutely right that houses can lose value. On the other hand, if the monetary value of the house is not your primary goal a house may still be seen as the best long term investment a person can make.

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  4. I have a little heartburn with #4, due to my study of the decommissioning of the Bank of the United States #2 in 1836. The cycles following that event do not support the claim that boom-and-bust cycles cannot occur without a central bank.

    I'm no fan of the Federal Reserve. But where has there ever been a modern first-world economy that has functioned well without central banking?

    I lean libertarian and I have studied a great deal of libertarian thought on central banking. But none of it answers the question I pose. Until this question is addressed in a clear and convincing manner, I won't be ready to chuck the central bank under the bus a la Andrew Jackson.

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  5. Craig41,

    If you think that we don't have a free market economy and that that is a good thing, then do you think it's fair to blame the current economic crisis on the free market as so many have done?

    I didn't say the Fed caused all booms and busts. The Fed hasn't been around for 100 years yet. Historically, it's easy to discover that most booms and busts are related to some form of central planning.

    David and Reach,

    There must be something wrong with the way I worded #4 because I respect that you both think the answer misleading. I didn't mean to suggest that a central bank is the only means by which boom and bust cycles can occur. Such cycles have occurred when there have been no such banks in the U.S. Individual banks can ban together to do what a central bank almost inevitably does--expand the money supply beyond the value of what is produced in the economy. If government hadn't generally been so willing to bail out such greedy fiascoes, but rather required banks to suffer from their mistakes, banks would behave much more responsibly. And the likelihood of booms and busts would be even smaller.

    From what little I have studied, however, (including that I am currently reading "Meltdown" by Thomas Woods) it seems that central banks in the United States have all presided over some pretty large booms and busts, due to their penchant for attempting--but failing--to manage the economy.

    It's hard to point to a country that has succeeded without a central bank due to the fact that central banks have pervaded the global economy for several decades now. We do have evidence, though, as in the case of the 1920 depression in the U.S., of which most people have never heard, due to the fact that (1) the Fed didn't do anything to fix it, and (2) therefore, it took care of itself in very short order.

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  6. Frank, as to question 2, are you suggesting that the financial market deregulation at the end of the 1990s didn't play a role in the increasingly irresponsible activities of the financial institutions?

    It is worthwhile considering that though conservatives like to claim that the business world is highly regulated in the US, the culture of disdain for regulation which the conservative movement has fostered for the last few decades has created widespread de facto deregulation through underfunding of regulatory bodies and a climate in which regulatory enforcement is frequently lax.

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  7. BTW, I think David's last point is a very important. Homes should be about a place to live, not an investment. That they are so much seen as the latter is an indication that our society is far too market driven; far too focused on money and too little focused on life.

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  8. Derek,

    Regarding #2, what I'm saying is that, properly contemplated, we see that what was actually happening was an increase in the kind of regulation that we don't often think of as regulation. The financial markets were able to behave the way they did in large part because of two forms of regulation: (1) The irresponsible, inflationary behavior of the Federal Reserve, and (2) the moral hazard created by a government that everyone knew would bail out the "too big to fail" financial institutions. Both of these behaviors are immoral. In the absence of these two **regulatory** behaviors, financial institutions would have been left to their own risks and devices, and they would have been much less likely to behave so irresponsibly themselves.

    I hadn't thought of David's comment about a house in the light that you suggested, but now that I have reread it, I see that point. I agree with both you and David in that regard. One of the most irresponsible behaviors in the past few years has been "house flipping". If the Federal Reserve did not create inflation and pave the way for housing (and dot com and etc.) bubbles, the ability to flip houses for a supposed profit would have been very unlikely. This is yet another way in which the Fed's irresponsible behavior has encouraged yet additional irresponsible behavior.

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  9. Frank, you and others make some compelling cases about the harmful effect of the activities of the Fed. But that does not mean deregulation does not play a role in the crisis.

    I think the house issue goes far more deeper than flipping (about which you are right, it is one of the most irresponsible behaviors). I see a number of otherwise very rational people who are extremely bothered by the fact that the value of their home has tanked in the financial world. For people like my SiL, whose husband got a job in another state and is unable to sell her home, this can be a legitimate concern. Most people, however, need to get a grip and learn to separate the vaunted market from reality. The plummeting financial value hasn't altered the structural integrity of the house. It still provides them the same place to gather as a family, same protection from the elements, and same safe place to sleep at night. Whatever the "market value," it should still have the same value to them.

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  10. You're right. What we traditionally refer to as deregulation has had a huge impact. But it couldn't have had near the impact if the fed hadn't given the artificial (and false) indication that house prices never go down.

    Home values are going down below where they should be because of the irresponsible actions of the Fed and the financial institutions. Eventually they will find their equilibrium (where their productive value matches the value that people place on them). If we don't get rid of incentives to over-speculate that central planning brings, we'll see another situation where the prices skyrocket and then plummet with a whole new round of innocents (and some culprits) left holding the (next) bag. Healthy economics avoids most of that.

    You say I see a number of otherwise very rational people who are extremely bothered by the fact that the value of their home has tanked in the financial world.

    In some instances this, to me, is indication of failure to live the commandment which says "thou shalt not covet."

    On the other hand, the situation that your SIL finds herself in IS so unfair. But it's important to recognize that the Fed is largely to blame for your sister-in-law's intractable situation.

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  11. Coveting has something to do with it. Another large contributing factor to this wave of panic is the emphasis of economic theory in our lives, theory which tries to quantify and judge every aspect of our lives in financial terms.

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  12. I am curious about what your source(s)are for this quiz on economics. Would you mind listing some references to support your facts and information?

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  13. Why? Do you think they aren't factual? Actually, they are mostly common sense. Would you like to refute them?

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  14. Thanks Frank. Your response says a lot.

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  15. Derek,
    Your comment "Homes should be about a place to live, not an investment. That they are so much seen as the latter is an indication that our society is far too market driven; far too focused on money and too little focused on life."
    I would have to disagree. Have you ever had to rent a home before? Assuming you have, if an investor didn't own that home, where would you live? It isn't all about money, it is about finding a need and filling it, in this case housing. I would agree however that too many people invest in real estate simply for the money, in which case, they have the wrong motive, but not in every case. I heard from an instructor once a phrase that I definitely agree with and will always remember, "Bless lives, make money. You can't do it the other way around-you can't put money first." I strongly agree, no matter what the application.
    BTW Frank,
    how did you get a picture of my mom? ;)

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  16. Danny,

    I knew that picture looked familiar!

    ;-)

    That's a good point about a home being an investment. I agree with that point, and I think Derek would, too. However, I remember when we were in Mississippi just before going to Iraq, I was reading a USA Today article about people buying homes and expecting to be able to sell them "next week" for about a $10,000 profit. That's an indication that the market is skeewompus.

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  17. Danny, your comment doesn't directly address what I was referring to (the fact that because our society is too focused on financial valuations, home owners erroneously tie their home's worth with financial value), but it does bring up a very important related point. The dwindling supply of low-income housing in urban areas, increasingly phased out to make way for higher-profit upper-income housing, and the similar phasing out of small local businesses to make room for higher-rent national chains and big box stores has serious social ramifications on our communities (and on the ability of the poor to function in society, in the case of the former). Yet it continues to happen, because the dominant economic theory in our society preaches profit maximization and self-interest. The model is "Make money; doing good is sure to follow," rather than the more enlightened "Do good, and you will make money" model you propose.

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