Friday, November 7, 2008

The Economic crisis: End of Capitalism??No more laissez faire??

The recent economic crisis originating from US and gripping the entire world like a wild fire signifies the defeat of the most acclaimed neo-conservative economic theory propounded by Friedman. “Free markets are inherently stable if left to themselves and depressions and other economic drawbacks are a result of government interventions”, if this was the theory which was so acclaimed and practiced to the core by the American people then why was the Wall Street bailout bill passed by the bush govt??
Why did the so called big names in the financial world need the $700 billion bailout??
Was the capitalist world so insensitive that it did not realize the aftermaths of such an event??
Were these corporate honchos so masked by the revenue figures and the profitability index that they did not pay heed towards the basic funda of lending loans? Lending loan without any collateral, when an average American was having 120% as his household debt, when his entire savings as a percentage of his disposable income was -2% makes absolutely no sense.
Was it again Victory for Keynes the great and the theory of moderate school of economics …??

3 comments:

PRASHANT said...

well I dont think its a defeat of Friedman. The world is flat- as we can see the contagion effect of recession now.
Now when unscrupulous people driven by plain sentiments and only backed by instinct, do business of finance and think they can earn a fat incentive if successful and if fail would destroy shareholders value(not their own) or get a bailout for their leverage this problem comes up. It is a kind of Agency cost that the taxpayer had to bear. Why Give a bailout? Let market forces operate and then people would be wiser and smarter in doing the business of finance in the future. By giving a bailout we are promoting a moral hazard.
Friedman is right- There is no force stronger than the market in the long run and so allow it to work.

Adarsh said...

i do agree with what u are trying to say here but markets left to themselves without any kind of boundings would necessarily result in such kind of activities and blaming any of the stakeholders involved is not correct as they were just trying to cash on the opportunity....i still feel friedman in explaining that the markets would flourish if left all by themselves, with referance to the present scenario was not correct.

PRASHANT said...

I respect u holding on to your views Adi. I simply mean to say dat if a AIG knows dat by buying CDS its going to kill itself and no taxpayer would bear the burnt of their misadventure, will stop them from doing business the way they did. What is a bailout.. govt is simply trying to spread the burden from the stakeholders, policyholders etc of AIG to public at large. Market teaches its own lessons
if left to itself. I am a strong votary of market economy and need to c a stronger reson to disbelieve
it.