Financial Crisis: Scam or Market Failure?

Hedge fund managers were before congress justifying their pay packages and arguing against regulation while pointing the finger of blame at the ratings companies for the crisis; aka scam aka; market failure.  So which is it?  Everyone agrees that crisis surely fits the bill, but the characterization of the crisis as originating in a scam or a market failure of epic proportions is being ruled out of court.

Here is the dilemma: characterize the crisis as a scam and then people will have to go to jail.  The problem is that if this be a scam it involves almost every single major player in the financial and political establishment in the US not to mention the UK.  In short, call it scam and a huge swath of the US ruling class would be on the hook.

However, if the crisis is characterized as a massive market failure (and massive is no mere hyperbole, perhaps understatement) then 30 years of patient theoretical innovation in the dismal science  not to mention the ideological underwriting service it played to the institutional restructuring of the past thirty years will have to be re-thought.

This is very much where we are today.  Everyone from the EU to GWB Jr., has been doing neoliberal damage control.  The problem is that it is being done with public money and the refusal to either indict the ideology or the players threatens to stoke the flames of a populist back-lash.  Serious folks know that, much like the Chernobyl explosion, the present crisis is very much an event that is still happening and almost no one knows what the half-life of the toxic particles are, or indeed their long term effects.

Bush almost sounds quaint when he says that the “state is not a cure all.”

Someone should tell that to the financial sector having now been possibly the largest welfare recipient in human history.

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3 thoughts on “Financial Crisis: Scam or Market Failure?

  1. And why not both. Sub-prime mortgages are a scam, a private-sector version of odious debts. Caveat emptor is not enough. The predatory bankers are crooks. Should go to jail.

    Market failure is a concept that contradicts neoliberal ideology such as the refusal to regulate. Alan Greenspan’s confession goes here. He doesn’t go to jail, but he is removed, has removed himself, from the pedestal. Informal justice. Hard to determine how much less credibility is warranted. This is a very slow process.

    The problem remains. There are too many in each camp, some in both. Unfortunately, as long as justice is a luxury we cannot afford, confidence in the economy is entirely unwaranted. Caveat emptor, while inadequate, appears to have replaced “do unto others” as the prime directive. Kevin O’Leary still proclaims on national TV that “greed is good.”

    We need to recognize that beyond those who are crooks and those who are mistaken is a small but very powerful class of white-collar psycho- and socio-paths to contend with. We have created them with our free market ideology, nutrured them, educated them, provided them with slogans and access to megaphones. We have primed the audience for them.

    It would be comforting to believe that we could just step up and pay the price for this all at once.

  2. What else it to be expected of a system which relies on endless credit creation and inflation of the monetary supply? This is more than a simple issue of the guilty having to be bought to “justice” (whatever that may be) for pushing an ideology that is flawed; this is more an issue of whether or not we accept a system which relies on living beyond our means on the backs of other poor nations over an ideology which requires personal responsibility and restraint.

    Cheers

  3. As mentioned by others a review of the banking system and understanding how money is raised needs to be carried out by every individual and commercial entity who has and does support Banks – that all in turn answer to one bank in the US and a one in the UK. The stock market is no exception to this, as people – possibly just a few individually control the outcome of stocks via Financial Times and other publication + other means. Its a fraud thats been allowed to go on for decades. The concerning thing is the intentions of those who have the control. Can we prosper with out having to borrow so much and sacrifice our lifestyles?

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