Friday
23Jan2009
The problem when ideology is ill-informed
Friday, January 23, 2009 at 3:18PM
From Dizzy "Thinks" ::
Spot on? You sure?
A lack of regulations in the CDS market, meant that when one institution collapsed (Lehman Brothers - or taking it further back and looking at another unstable financial instrument, Bear Sterns), the others lost confidence in each other as they had no idea as to each other's level of exposure to the crisis.
The day-to-day borrowings between financial institutions seized up, and businesses in the real economy couldn't secure short-term lending to continue operating (I used to arrange this borrowing myself when I worked in finance). This sparked the inevitable market correction that many of us had been predicting for years.
It was absolutely a lack of regulation of the these complicated financial markets that meant there was no transparency, and credit traders couldn't calculate risk with any level of confidence. Fear spread quickly, and governments - rightly or wrongly - decided they had no option but to step in and try to grease the system, to prevent many companies having to cease trading because capital they relied on had dried up.
(History: The Republican legislature and Clinton White House took a pass on regulating this emerging economy, who along with our own European governments, share responsibility for the initial collapse.)
I don't like regulations per se, but they're often a necessary evil to ensure the stability of a system we all rely on. Good governments write good laws and set sensible, lean and robust rules.
Maybe some of the existing regulations in the banking system are crap, but you'd be a fool to suggest that it was regulation that caused the initial collapse, when it's the exact opposite that's true (in the specific cases of CDSs, CDOs, and short-selling).
It's no use taking an ideological laissez-faire attitude, if you don't understand the fundamentals of the system, and how a lack of transparency (see rules) can lead to massive 'systematic risk'.
From former Spanish PM José María Aznar López on whether the current economic crisis signifies a failure of the free market.It is certainly not a failure of the free market, but a failure of the current mechanism of state regulation and intervention in a sector which is already highly regulated, the banking system. It is the same with politics - democracy is not discredited merely because a bad government has been elected.
Spot on.
Spot on? You sure?
A lack of regulations in the CDS market, meant that when one institution collapsed (Lehman Brothers - or taking it further back and looking at another unstable financial instrument, Bear Sterns), the others lost confidence in each other as they had no idea as to each other's level of exposure to the crisis.
The day-to-day borrowings between financial institutions seized up, and businesses in the real economy couldn't secure short-term lending to continue operating (I used to arrange this borrowing myself when I worked in finance). This sparked the inevitable market correction that many of us had been predicting for years.
It was absolutely a lack of regulation of the these complicated financial markets that meant there was no transparency, and credit traders couldn't calculate risk with any level of confidence. Fear spread quickly, and governments - rightly or wrongly - decided they had no option but to step in and try to grease the system, to prevent many companies having to cease trading because capital they relied on had dried up.
(History: The Republican legislature and Clinton White House took a pass on regulating this emerging economy, who along with our own European governments, share responsibility for the initial collapse.)
I don't like regulations per se, but they're often a necessary evil to ensure the stability of a system we all rely on. Good governments write good laws and set sensible, lean and robust rules.
Maybe some of the existing regulations in the banking system are crap, but you'd be a fool to suggest that it was regulation that caused the initial collapse, when it's the exact opposite that's true (in the specific cases of CDSs, CDOs, and short-selling).
It's no use taking an ideological laissez-faire attitude, if you don't understand the fundamentals of the system, and how a lack of transparency (see rules) can lead to massive 'systematic risk'.
Reader Comments (4)
What Jose Maria Aznar writes in English and what he does in Spanish have many points of discrepancy.
He is a born dictator with arrogance and no sense of humility, I can assure you. And a close friend of Rupert Murdoch's.
Hello Jose, old friend. :o)
Indeed, Aznar was part of the gang, was he not? Aznar, Berlusconi, Blair and Bush. Just the sort of creeps Mr. Murdoch likes to keep close.
Indeed, Aaron, he was even about to get a medal (bought, of course) from the Americans, for his "bravery" for sending Spanish soldiers to a war that did not concern us, for which action he lost the government of Spain. In this case Democracy in Spain worked to perfection.
Something that filled him with deep resentment, although Murdoch appointed him (shamelessly) to his Media holding's board of directors.
Free market is an absurd word. The banking system is not, because the banking system has been for years the real controller of our economies.
A relevant Socialist in Spain, formerly a Communist, Santiago Carrillo said about this that the problem was with the Banks controlling the countries' economies and not all the way round.