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Wrecked by overpaid, under-regulated speculators? Er, no.

Posted by Richard D North in Media / Money on 11 October 2008

Why we posted this: We all long for a clear explanation of what has gone wrong in the world’s markets and what might help put it right. As usual, the trick is to avoid simplistic populism.  The Economist has managed a readable account which fits the bill.

The original story:
When fortune frowned
When fortune frowned 
Zanny Minton Beddoes
The Economist
9 October 2008

Strap: The worst financial crisis since the Depression is redrawing the boundaries between government and markets, says Zanny Minton Beddoes. Will they end up in the right place?

Summary of the stories:
The airwaves and prints are full of voices, some of them belonging to politicians, which suggest that it was the Thatcher-Reagan bonfire of regulations, plus short-selling and other speculations and fatcat greed, which got us into this mess.   

The Economist magazine begs to differ in an analysis which suggests that these are relatively slight factors compared with the cheap money and general air of complacency which governments have allowed. Besides, people were working in a system and using tools which no-one understood and without the caution that might have helped.

In particular, some heavily-regulated financial organisations (Freddie Mac and Fannie Mae) behaved foolishly. Some firms which incentivised employees for the long term got into trouble. Few commodities seem really to have reached very high prices because of speculation.

The Economist‘s survey suggests that when the dust settles, sorting things out will require clever internationally-agreed regulation.   

livingissues comment:
Disliking capitalism is easy and natural, but useless. We are stuck with it, and taming it isn’t quite the point. Tame capitalism would be like a tame party: a bit pointless. It is particularly important not to blame greed or selfishness for capitalism’s current failures. The people who have let us down would not be any better at their jobs if they were less hungry for profit or cared more about the under-privileged. 

No, the point is that they weren’t sufficiently cautious. Their greed was allowed full rein and no-one made sure that they knew a good deal of fear too. That’s the crucial balance which we will have to regain.

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