Friday, September 26, 2008

Does Capitalism Work?

If you consider the doom and gloom surrounding the worlds financial markets today – capitalism is on trial. Free capital markets have presumably stalled and risk impacting the global economy. Thereby the need for urgent government intervention.

Does the thesis that efficient and free markets correct themselves over time and don't need external (aka government) intervention a sham? Maybe it is another attempt to engineer a "soft landing" for the economy by the federal government. There is a lot of speculation about the worse case scenario - and as always who can predict the future.

At one point we were led to believe that the failure of an investment bank like Bear Sterns would be catastrophic for the markets – so it was not allowed to fail. But a gloomier fate awaited Lehman Brothers, just a few months later. Lehman Brothers was presumably not that critical to financial markets.

In the current environment of proposal, counter proposal, alternative, options and politics - one wonders about the state of capitalism. At a simple level of buyer, seller and free market - it makes sense. At the level of counter-party risk, MBS, SIV, tranches and freezing credit markets - is it still capitalism or complicated and opaque means to make money by the few at the expense of many?

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