We always pride ourselves in are free markets and say little government involvement is the best. However, the last financial crisis in the mortgage market was helped along by the subsidies and government insurance in banks. These policies increase risk-taking because if a bank is government back they don't feel the need to actual look in depth at their performance. The article says "governments should as far as they could treat financiers like any other industry, forcing bankers and investors to take as much of the risk as possible themselves. The more the state protected the system, the more likely it was that people in it would take risks with impunity."
If we continue on this path of state involvement and cradling of the financial markets we will mute the beneficial effects of finance. "Healthy financial markets speed up an economy, channeling credit to firms that need it. They can also make an economy fairer and more competitive, providing the funds for those without them to challenge incumbents. Modern finance is a more slanted system in which savings are drawn towards subsidies and tax distortions. Debt-fuelled housing goes wild while investment in machines and patents runs dry. All this dulls growth."
How do you think we should go about changing the state and federal involvement in the financial market?
http://www.economist.com/news/leaders/21600699-state-subsidies-and-guarantees-are-once-again-corroding-financial-sector-and-creating-new
3 comments:
I agree that " it is hard to see how entrenching state support will prevent excessive risk-taking".
In addition to Amber's statement, continuing on the path of state involvement (and coddling) of the financial markets we will not only mute the beneficial effects of finance but this will also encourage excessive risk-taking, which will cause the financial market equilibrium to go completely out of wack.
The state should have minimum involvement in the financial market because the state is (or should be) apart from the technical role of consumers and firms in financial markets. Government subsidies and taxes are meant to help firms and consumers in the market, not direct state involvement in the financial market itself. When the sate chooses which firms to channel credit to the state is, no matter how "indirectly", picking winners and losers and the foundation of our free market is contaminated.
I think the financial industry in the U.S. is too tempting, too concentrated to be free from state. They may learn something from the crisis in 2008, but with such big banks, another incident and it can bring the economy down again. I also doubt if the economy will grow that way once we let the bank free from state
The problem with the American system lies with the Federal reserve. The reserve managing the countries wealth is a private entity. Only a handful of banks are allowed to trade and sell American debt. This is the reason why the common people did not benefit from the quantitative easing. Only corporates benefited from the private fed printing money to buy bonds from itself. America needs to make that a public entity before doing anything else, otherwise the incentives would always be perverse
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