Monday, September 29, 2008

Where We Are...

Today's Financial Times sums up where we find ourselves this morning:

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.

Why should the average person on Main Street who saved and scrimped to put one third down on her home with a fixed 30 year mortgate support the bailout? The Times answers"

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.


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.

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.

That's not to say we don't need to take a hard look at our current financial system and the regulations it operates under. But this will take some time to do it right. What's most needed after the bailout is a commission to look into the whole subprime meltdown and the resulting credit crunch and propose the necessary revisions to our current system. But that's the next stage. Right now we need to get the bailout right.

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