Posts Tagged ‘business failure’

The financial crash

Sunday, September 21st, 2008

Brad de Long looks at the financial crisis, and concludes that the wise and good hand of government is necessary.

Third, the market fundamentalists in other sectors will need to be quiet for quite a while. We have just seen financial markets rife with moral hazard, agency, and adverse selection problems crash spectacularly. Is this a situation in which we should move health care–also rife with moral hazard, agency, and adverse selection problems–toward a free market configuration? No. Market regulation needs to be smart.

He gives us a wonderfully clever explanation about multiple financial equilibria. The good hand of the wise and superior technocrat is needede to hold the market at the good equilibrium, and keep it away from the bad equilibrium. Eventually, however, he gets around to mentioning that this explanation is completely irrelevant,for the various financial intermediaries were in fact stony broke.

The cause of the crisis was nothing to do with market failure. Rather, the problem was business failure – businesses made lots of very bad loans, and accounting failure – accounts were prepared in faithful compliance to Sarbanes-Oxley, as the government commanded in excruciating detail, thereby completely obfuscating the fact that these businesses were insolvent.