News
Too Big to Fail undermines the free market faith
Published on 23rd January 2012 by Kate Benson
Looking at the evolution of the financial market crisis, the only surprise is that it took so long before a serious movement materialised.
As a result, the basis of free markets has been shaken. A market economy rests on the principle that individuals are free to act within boundaries set by a legal system. Individuals are invited to exploit opportunities and to assess risk. No other system can release the same amount of potential locked inside individuals. As Hayek explained, the market is the best discovery process.
The rules of the game should be clear. Those who succeed are free to take the profits (after taxation); those who make losses have to bear the consequences, with bankruptcy the ultimate sanction. Thus, “too big to fail” not only undermines a fundamental principle of market economies but also a principle of societies in which individuals are responsible for their actions.
The taxpayers’ billions committed to rescue supposedly systemic institutions have dealt a big blow to confidence in the free market system – and has in turn become a threat to free societies. The threat has been aggravated by people expecting more from governments than politicians can actually deliver – while at the same time trust in politicians, it seems, has fallen almost everywhere to its lowest ever levels.
Meanwhile, the financial industry still fails to give a convincing answer to fundamental questions: to what extent do its activities contribute to the welfare of society and are they indispensable for a dynamic economy?
It would probably be too much to expect the financial sector to respond by saying that, in fact, some parts of its businesses are superfluous or even dangerous. So, governments are confronted with the challenge of creating a convincing system of regulation and supervision that enables the financial industry to deliver services considered indispensable but, as far as possible, prevents it pursuing activities deemed detrimental to society.
Notwithstanding a number of encouraging improvements, such as higher capital requirements and greater transparency, this task is anything but completed. The challenge of strengthening the fundamentals of market economies and free societies continues. History never ends – except in the minds of those who believe in the inevitability of the Mayan calendar, which predicts the end of the world in December 2012.
Please see article online at - http://www.ft.com/cms/s/0/f673c85a-42b1-11e1-93ea-00144feab49a.html#axzz1vEVTLDWP