O ye of little faith! This crisis is evidence the market is working

In an article with the above title published in last week’s edition of The Spectator, Matthew Parris reminds us that things are not nearly as “abnormal” as some would have us believe, and the market is doing precisely what it is supposed to.

“The market has not failed. The present collapse is evidence that the market is working. Confidence bubbles are an inherent feature of a free market system.

“Panics — confidence vacuums — are an inherent feature too. The test of the theory of market capitalism is whether the system provides from within itself the means to prick both. It does. The first — a confidence bubble — has been pricked. We are now sucking ourselves the other way: into a confidence vacuum. In time this too will be pricked. The market will steady.”

As Parris goes on to explain: “The bubble that has just burst was based, worldwide, on financial services. Financial services are a product. It is true they are a product critical to the efficient functioning of the market (so is electricity, so is oil) but that just makes them an unusually important product. From time to time products fail in any market. They may fail through force majeure — droughts, floods, pestilence. They may fail due to inherent flaws — airships, Thalidomide, blue asbestos. Or they may fail through ignorance, trickery or the credulity of human beings — Madoff, the property bubble, the repackaging of sub-prime debt. The present financial crash has been precipitated by product failure of the third kind. Trade in financial instruments too opaque for even those who traded in them to assess them properly, and bonus incentive schemes that acted against the interests of the companies offering them, fuelled a banking bubble that has now burst.”

“But ask: what pricked it? Did politicians rumble the trade? Did governments, or international forums or symposiums, provide the sharp instrument? Did academic research and expertise expose the dodgy product? Did statutory regulators apply the pin? No, the free market wised up and pricked this bubble. Politicians and finance ministers (if they had had the power) would have tried to keep it inflated. The market puffed itself up, and then, without intervention — despite intervention — the market let itself down. The speed with which this has happened has been awful but, however inconvenient for many or catastrophic for a few, correction is not a failure of the market, but a success.”

Parris predicts: “There will be no new economic world order, just some useful tweaks to the old one. No re-examination of our governing theories of political economy is called for.” His final piece of advice: “Calm down, dear, it’s only a market correction.”

In case you think that’s simply not good enough here’s an alternate piece of advice from Jack Handy: “If you ever catch fire, try to avoid seeing yourself in the mirror … that could really throw you into a panic.”

Source: Michel Pireu, O ye of little faith! This crisis is evidence the market is working, Business Day, February 25, 2009.

For text: http://www.businessday.co.za/articles/markets.aspx?ID=BD4A946604

FMF Policy Bulletin/ 03 March 2009
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