Friday, September 12, 2008

Intervening decisively in Fragile Financial Markets is Not Analogous to an Instant Intervention in Long Standing Tariff Removals

Art Pritz in The Quad-City Times writes on: “Takeover of the Mortgage Giants: Any Precedents?” (HERE)

The mortgage meltdown was to a fair degree a result of deregulations implemented by the Bush administration as part of its neo-conservative agenda. Adam Smith, the godfather of free market economics, once pointed out that if you have a highly regulated economy, then you should not transition to a free market overnight without judiciously weighing and taking into account the likely results. He figured that chaos would surely result if one didn’t think ahead. He was, as usual, right considering how our current mess took place.”

Comment
It’s true that Adam Smith cautioned against the government dismantling tariff protections at a stroke, fearing that this would put thousands of poor labourers out of work. Much better he suggested that such drastic changes take place slowly and gradually to allow labourers to adjust to the changes.

However, it is a stretch to apply the same cautions to a large segment of the mortgage finance market (about 50 per cent in fact) who are going bust imminently.

The consequence in the resultant financial disruption if Fannie and Freddy went bust within hours would likely have been catastrophic for millions of employees if their fragile firms went bust over night on a scale much larger than a unilateral tariff reduction which would take some weeks, perhaps months to work through – tradable imports do not move an infinite velocity, one month kept low or out, and the next month flooding in.

In financial markets credibility is easily punctured. Acting when they did is good sense financial management.

In Britain the government dithered over the crisis in Northern Rock which worsened the crisis, and Northern Rock did not play on anything like the scale of Fannie and Freddie in their markets.

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