Tags Finance

I'm having a hard time understanding why many people are blaming the free markets for the recent economic crash. The most popular opinion is that the government has let the markets "run wild", and it should now regulate them more instead. But IMHO, this is the exact opposite of the truth!

If anything, this economic crash happened because of too much regulation, not too little. The mortgage loopholes, the whole subprime business, was made possible by governmental intervention into the free market. This resulted in a bubble, and now the bubble has burst and pulls down the whole economy.

Circa seven years ago the dot-com bubble has burst and caused a short period of recession, which hurt most badly the industry that originated it - the hi-tech, software and internet businesses. This makes lots of sense, and I don't think anyone serious blamed the free markets for the crash. The free markets (like most economic theories) work over prolonged periods of time, not over short few-year spans. The dot-com bubble burst made lots of investors cautious, and a similar burst is very unlikely any time soon (though it will happen eventually, since people have short memories. See the tulip mania, for example). A few months ago (before the big crash) the NASDAQ index was at 60% of its value in the peak of the bubble. This is the free market's way of correcting itself. Some business model seemed successful at one period of time, but (again, as happens a lot in economics) most investors didn't really know that it was shaky - a bubble. So the market crashed - it makes sense.

The same can be said about the latest crisis. Yes, it's deeper, because the financial and banking industry is much larger and affects much more people than the internet business. But it was a bubble none-the-less. And moreover, it was aided caused by the government's regulation of the loaning business. And eventually (in a few years, it seems) - the free market will correct itself, and people will just be more cautious in the future.

But the government tries to solve the problem by even more intervention. My opinion may be unpopular on this subject, but I'm not sure that bailing out banks is a good idea. It's an incentive to err again in the future, and that worries me. Brokers who went loose with the inverstors' money that was based on shaky foundations, and those bankers who've lent money knowing that it won't be paid, but that they will get the bonus for the deal, won't be careful next time, because the government has intervened. "The fed will save us again" they're now saying, and as soon as the crisis ends they'll be back.

Recently I've heard that the incentives programs of the big governments include not only saving banks but also real economic incentives for returning to growth. This is great, but I'm still concerned about the ratio of these expenditures. Saving banks won't help the economy recover, incentives to the industry and to consumers will.