Wednesday, 17 September 2008

Wall Street "Crisis"

No one doubts that Wall Street has been going through some tough times in the last few days, with some major collapses, bail-outs, and bankruptcy claims. Therefore, it is important to re-affirm that, in a free market, people and companies (especially the latter) need to be flexible.

The truth of the matter is, in recent times, both consumers and business owners have been protected, to some degree or another, by a safety net (for instance, the welfare state, or the recent bail-outs of Fannie Mae and Freddie Mac in the US). The safety net, by "guaranteeing" economic security, has destroyed the basic need to be flexible; which is one of the most important traits a person or a business could have in a free market. It has also removed much of the need to make intelligent investment decisions (hence, the sub-prime mortgage crisis).

In a time such as ours, when events that happen half way around the world can be known here within seconds, and economic circumstances are constantly changing, more rapidly now than ever. Companies have to continually adapt to the changing circumstances to survive.

This is what we're seeing on Wall Street at the moment. Instead of proper, if drastic, market correction taking place, more and more financial institutions are being bailed out. However, financial assistance only helps to delay the eventual collapse-and magnifies it, as it now impacts the government and its expenditure. Having taxpayers money go to inefficient banks and financial institutions is a waste of money.

There's also interest rates. For a number of years, the Federal Reserve kept interest rates artificially low, which artificially bolstered the home loans market and, as thus, magnified the recent collapses.

The solution to all this madness, is, of course, to get the government out of the way of business, allowing them to succeed and fail based on their merits. By doing that, businesses will be forced to:

a) make smarter investment choices;
b) look for solutions in other areas for their problems, rather than making decisions under the pretense that the Government will bail us out;
c) force consumers to make smarter decisions in which companies to deal with;
d) stop irresponsible lending to people who can't pay it off.

All in all despite the stress that many people will have to endure during the market corrections going on at the moment, government intervention can only magnify the problem.


Elijah Lineberry said...

You are quite right about more sensible investment decisions.

Most of these Wall Street chaps are hopeless when it comes to that sort of thing; the British are as bad; and the Japanese are even worse!

As I have said before, the best investors are doing it for themselves...working for themselves and making profits.

Elijah Lineberry said...
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