financial markets

Posted at 1:38pm on May 8, 2008 Naked Free Markets

A Little Moral Hazard Goes a long, long, way

By blackhedd

Global financial markets have been in disorder for nine months now. (The birthday of the crisis is August 8.) There are widespread indications that the most fearsome disruptions, in the credit and interbank lending markets, are now abating around the world, thanks to aggressive and unprecedented actions by monetary authorities. Of these, the Bernanke/Geithner Federal Reserve deserves the lion's share of the credit.

It's entirely true to say that the world of finance has been fundamentally changed by the Fed's response. But for good or for ill? And what should happen next? As it turns out, this is an incredibly important question that carries an extraordinary amount of political risk. And it needs to be fully aired in the current political campaign.

Milton Friedman repeated the observation that change only happens at moments of real or perceived crisis. He astutely added that when change comes, it's based on whatever ideas happen to be lying around at the time. Today, those ideas are overwhelmingly on the side of massive new regulation of not only financial markets, but also of the real economy.

Is there an alternative? Read on...

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