Tuesday, November 18, 2008

Free Markets Run Amok

Eliot Spitzer wrote a piece for Sunday's Washington Post titled How to Ground The Street. It's a quick, but worthwhile read. Here is one (but certainly not the only) of his compelling points:
...unregulated competition drives corporate behavior and risk-taking to unacceptable levels.... A market is a product of laws, rules and enforcement. It needs transparency, capital requirements and fidelity to fiduciary duty. The alternative, as we are seeing, is anarchy.
As we move forward, Spitzer says:
  • ... we need better control of systemic risk...[because]... nobody can really understand the full risk facing the financial system.
  • ... investors must be protected with adequate, accurate information. Firms must offer transparency both to individual investors and to government regulators.
  • ... we have to step back from the current environment in which government has become a guarantor of all major risk. Only if private actors have to bear the real risks they incur will the market function properly. We are now perilously close to nationalizing risk.
In the same section of Sunday's paper, check out A Recession Can Clear The Air, in which Charles Morris makes an argument for letting the recession run its course without pumping tons of money into minimizing the short term pain (but ultimately extending and worsening it).

I hope that Obama is listening to really good financial people, but the perfect plan won't be enough. He'll also need to figure out how to sell the plan to the US public.

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