Archive for the ‘Sub-prime crisis’ Category

Letter to an Independent editorialist (On Market Fundamentalism)

Dear Mr. Hari,

I have read your opinion piece in the online edition of The Independent :

and I feel that, while well meaning, your comments may not be directed at the right target.

The present crisis in the world’s financial markets cannot be unequivocably blamed on “market fundamentalism”. It is not obvious at first, but the large financial institutions (linked closely to the central banks) are not themselves fundamentalists. For if they were, they would not be begging the government or the central banks (institutions of government) to rescue them at this time. They are also not what we might call institutions of the free market, of which profit, but also loss is a fundamental aspect.

Don’t believe my word, this is what Alan Greenspan is saying:

“To the extent that there is a central bank, that is not a free market; and most people call it ‘regulation'”

If these bad lenders would be allowed to pay for their mistakes (go bankrupt, or shrink their operations), then they can’t be called institutions of the free market. “Moral hazard” is often mentioned and real in such a case. Financial institutions have been working on the assumption that they have a lender of last resort and a buyer of last resort. As such, they have been more reckless than otherwise in awarding loans and managing the capital with which they are entrusted.

On the premise of saving the financial markets, the central banks (the US Federal Reserve in particular) have sought to divert resources from other parts of the economy by awarding preferential credit to these loss-stricken companies. In this way, they are pulling away productive capital from elsewhere and pouring it into the Wall Street and the other financial centers.

So not only do we have a massive misallocation of resources from the mortgage crisis, capital is still driven into these proven failed ventures. Instead of being “market fundamentalists” and letting the dice fell where they may, central banks are taking an active role in regulating the markets.

We may disagree about the benefits or shortcomings of markets, but we cannot attribute this crisis on markets per se. Instead, we should look at the non-market forces coming to play and take them into account as well.

Please refer to this little clip for a more down-to-earth explanation of the crisis:

I hope the above makes sense and I’m looking forward
to your input.

Yours Sincerely,