I am a fan of free markets. And so I generally start with a bias of skepticism when governments intervene. But the magnitude of recent developments calls back to mind that markets have some important limitations.
- Transparency. In order for a market to really be "efficient" in the technical sense of that word, they have to be transparent. In other words, all players in the market need to have access to the same information. That's the only way buyers and sellers can agree on true market prices. That works pretty well in some cases like, say, large cap stocks. But in the case of mortgage-related securities, the opacity level was way too high. Case in point: how many people reading this post could explain a credit default swap or a collateralized debt obligation? There were a subset of quants who could explain them, but that doesn't make for a truly efficient market.
- The Right Tool for the Right Job. Financial markets are quite good at solving financial problems. Again, a good example is large cap stocks - if the problem is: how much should a share of stock in GE cost? Then the market is an excellent tool for answering that question. But financial markets are not very good tools for solving social problems. For example, one of the presidential candidates would like to shift the U.S. healthcare system onto a free market platform. This would likely not work very well because, while healthcare has a financial facet, it is fundamentally a social problem. And financial markets are not effective at solving social problems.
10 comments:
I like your insight. Our family goal of simplifying keeps resonating for me this week.
Well i could explain any of them, or all of them that have come also across my path like the health care reform for the job creation in the bailout that we are all so ill about with the people that I'm also talking with for reform of the economy reform and in what respect craig bobby?
Have you considered a future in politics? I think you're a natural.
Yeah, but can she kill, clean and cook a moose?
That's what I'm talking about.
Opacity and complexity are clearly issues when dealing with some of these financial concerns -- it's a scary thing when even the chairman of the Fed needs someone to explain some of these things to him, and he's arguably one of the smartest financial minds in the world.
As to the whole financial/social aspect of things like healthcare, we have to take into account that there's a certain complexity to them as well. People like one-syllable solutions for problems like that, but those rarely work.
The Enron drama was not just a compelling story, but very enlightening about how greed overwhelmed safety mechanisms that were designed to save large organizations not just from the unpredictable vagaries of the marketplace but from lapses of judgment on the part of management. I understand little about this particular financial disaster, but I would be surprised if this same phenomenon wasn't present in spades.
Do you mind if I call you Joe? Because I have this really cute quip I want to use on you later on.
Aw, SB, say it ain't so! There you go lookin' back at the past debates also and the pickin' apart of those pesky past details! We mavericks are all about the reforming the Future, and all you wanna do is talk about if humans contributed to this financial situation they find ourselves in, when we also wanna just move forward and FIX it, doggone it! Also, we'll bring that forwardness reform to those financial institutions which need some common sense regulation to shore them up so we can get on with these free market economies we regular folk up in Alaska like to call capitalism. God bless ya, SB!
And jblog, as to your question about moose killin', I'd just like to discuss the tax reductions we mavericks are in favor of also, so that we can once again free up those corporations to bring more profits to themselves with which they will also create more jobs in China and India for the strong fundamentals of our strong economy, the joe six pack workers of America.
Lora, you're the most mavericky-est blogger I know.
I love John McCain, I'd take a bullet for him. But the man is mentally unstable.
Lora has become the Tina Fey of CeeBee in Paree.
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