In praise of free markets The financial system has reached the point of maximum peril. After years of profligacy, banks have all but stopped lending to each other as the US Congress decides whether to extend support. If the unravelling of the banking system continues, the economic consequences will be dire. Yet there is an even greater risk: that the politicians now contemplating Wall Street's follies draw the wrong conclusions and take the wrong decisions, losing their confidence in markets altogether. It would not be the first time. After the Wall Street Crash, markets were deemed to have failed and US lawmakers attempted to regulate short-cuts through the crisis. The widely-copied Smoot-Hawley Tariff Act quadrupled the effective tax rate on thousands of imports and deepened the "Great Contraction" of 1929 to 1933. The price of popular anti-market sentiment was much higher in some of Europe's fledgling democracies: fascism.
The financial system has reached the point of maximum peril. After years of profligacy, banks have all but stopped lending to each other as the US Congress decides whether to extend support. If the unravelling of the banking system continues, the economic consequences will be dire. Yet there is an even greater risk: that the politicians now contemplating Wall Street's follies draw the wrong conclusions and take the wrong decisions, losing their confidence in markets altogether.
It would not be the first time. After the Wall Street Crash, markets were deemed to have failed and US lawmakers attempted to regulate short-cuts through the crisis. The widely-copied Smoot-Hawley Tariff Act quadrupled the effective tax rate on thousands of imports and deepened the "Great Contraction" of 1929 to 1933. The price of popular anti-market sentiment was much higher in some of Europe's fledgling democracies: fascism.
Yeah, right - the only policy decision of note after 1929 was Smoot-Hawley. Not the regulation of banking and the New Deal. Interesting vision of history...
Consider the Washington rescue package first. Why should taxpayers bail-out millionaire bankers, and what should we force them to give back in return? Those are natural questions but not the only ones. We should also ask whether taxpayers will profit, directly or indirectly, from spending money to shore up the banking system. The answer is "yes". The system is close to collapse, and the consequences of collapse would be misery for Main Street. Profitable businesses and creditworthy consumers would suffer. A successful rescue would prevent that and there is even a small chance that it would be profitable in its own right. That is the justification for the rescue. Congress was right to scrutinise it - especially its lack of oversight - but has become distracted by a desire to clip Wall Street's wings.
Yes, let's focus on the short term: it's true that Wall street can take down Main St with it. That would seem like an additional argument for clipping Wall St's wings, not a mitigating factor - but hey, what do I know?
The case for more effective regulation is nevertheless undeniable. It is hard to defend a system where top banking executives walk away with millions in compensation when their businesses are, in retrospect, fundamentally flawed. This looks like a reward for failure. We have witnessed two financial crises - the dotcom crash and the current banking disaster - in the first decade of this century. That is hardly a record which inspires confidence in the current efficiency of capital markets or their transparency. The current crisis is routinely described as a symptom of deregulation, but it is equally the child of earlier, ill-fated interventions. Subprime mortgages grew because the prime mortgage sector was dominated by Fannie Mae and Freddie Mac, two institutions founded, regulated and effectively underwritten by the government. Securitisation was an effort to sidestep capital requirements. But it also created instruments that few could understand and, in Warren Buffett's prophetic words, really were "financial weapons of mass destruction".
The current crisis is routinely described as a symptom of deregulation, but it is equally the child of earlier, ill-fated interventions. Subprime mortgages grew because the prime mortgage sector was dominated by Fannie Mae and Freddie Mac, two institutions founded, regulated and effectively underwritten by the government. Securitisation was an effort to sidestep capital requirements. But it also created instruments that few could understand and, in Warren Buffett's prophetic words, really were "financial weapons of mass destruction".
Deregulation = bad regulation = government sucks
The chutzpah is quite amazing, really. They pretty much got all the deregulation they wanted, and all the downside protection the financial sector wanted, and now the government is to be blamed because it obyed the financial sector's every wish?
Capital markets clearly need better regulation but policymakers should guard against unintended consequences. Markets are places of trial and, very frequently, error. Their genius is not perfect efficiency, but the rewarding of success and the weeding out of failure. No better alternative has ever presented itself.
Isn't the point we're at today pretty much that failure is NOT BEING PUNISHED????
This is a difficult time to defend free markets. Nevertheless they must be defended, not only on their matchless record when it comes to raising living standards, but on the maxim that it is wise to let adults exercise their own judgment.
Matchless indeed:
Market freedom is not a "fundamentalist religion". It is a mechanism, not an ideology, and one that has proved its value again and again over the past 200 years. The Financial Times is proud to defend it - even today.
The only silver lining is that, for the first time in a long time, they sound a tad defensive to me...If they feel the need to argue they are not a "fundamentalist religion", we're finaly making progress. yey! In the long run, we're all dead. John Maynard Keynes
Rereading that sentence using advanced technology such as my eyeballs and plain English semantic analysis, I think what it says is:
"Quasi-Government organisations were unbeatable in the segment of mortgages that made sense, so truly private ones, to pretend that they were better, had to create a market of mortgages that made no sense".
And that despite the fact that Fannie and Freddie were actually private institutions that relied on corruption. Imagine a genuine government bank -it would have wiped the floor with those offering insane salaries to their top managers. "Few can believe that suffering, especially by others, is in vain. - Galbraith"
Imagine a genuine government bank -it would have wiped the floor with those offering insane salaries to their top managers.
I don't think you have to imagine one: just look at what the Scandinavians do - or used to do until the politicians were browbeaten into thinking this was "unfair" competition to the private sector....aided and abetted by EU directives, unless I am much mistaken..... "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
As now of course private banks get this subsidy as well, one might rethink the idea. Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
Fannie and Freddie were privatised in the 1960's!!! A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
