Category: Government

On the (US) Financial Crisis of 2008-200′

I initially thought of writing a post which explains the possible causes of the present financial crisis in the United States. But, to my dismay, I found that it has been/are being discussed by the BBC, IMF, New Left Review, EPW and Wikipedia. (The list is not exhaustive.) However, I was delighted about the fact that I did not have blog about the details; I can directly plunge into my reflections regarding the crisis. Therefore, the present post is concerned with a few issues that have risen in my mind owing to the crisis.

1) Should financial institutions be completely unregulated’ In other words, does a ‘free market’ set up result in a favourable outcome, where the resources are allocated efficiently’ By ‘free market’, I mainly refer to a situation where market forces like ‘demand’ and ‘supply’ are not tinkered by any external body.

2) Is it financially prudent for financial institutions to invest much more than their savings’ Investment and savings need to be understood as financial capital. Money was advanced on the premise that the future conditions will be favourable; there was no actual collateral. This is what happened in the sub-prime lending market. To add to that, the drive to make faster and higher profits induced the banks to lend that money to (unregulated) financial intermediaries. Money (funds) was not advanced for production purposes (industrial capital). Financial capital is a way to make huge profits in comparison with industrial capital, which produce commodities by means of commodities. With the progress of Capitalism as a mode of production, the wealth of the nation (understood as GDP by orthodox economists) has changed from industry to financial services ‘ derivatives especially. In textbooks, progress is shown by a movement from agriculture to manufacturing and finally to services. In my opinion, it is the institutionalization of financial capital which is the source of present crisis.

3) The system thrived of the belief that the ‘alarms’ created by the quantitative analysts (Quants) would sound. [For more on Quants, read this.] They rely on mathematical models to estimate risks. Remember Black-Scholes, Markowitz and Robert Merton, Nobel Prize winners in Economics! One of the things that we learn from reading Keynes’s General Theory is that expectations cannot be quantified. To build elegant models, expectations can be quantified to some extent with the aid of probability. But, it shouldn’t be used in policy making lest the expectations of the individuals change drastically. But, New Keynesian Macroeconomics has to its (de)merit ‘Rational Expectations’; I wonder about the extent of the interpretations of Keynes’s works.

Another interpretation to the crisis would be that, the market does identify ‘problem makers’ within it. Think of the various asset bubble bursts that have taken place. But, with the complex and tight interdependencies of various economies in the world, a financial crisis can have repercussions on other countries as well, mainly through international trade. Thus, it is important that every country devotes resources for (trying to) understanding these interdependencies for solving the problems of today.

Update

Read this essay at Risk Latte. I am happy to find such views on a financial company website.

India: Public and Private spending on Health

The following three maps will show us that, though the’spending in health by the private sector is comparatively much larger than the public sector, yet HIV prevalence is very high in India.

This shows the dire need for targeted public’investment in health care. This is because private sector’investment does not extend to the rural areas and regions with low purchasing power. [Investment is a part of spending]

Public Health Spending

Territory size shows the proportion of worldwide spending on public health services that is spent there. This spending is measured in purchasing power parity.

HIV Prevalence

 

Territory size shows the proportion of all people aged 15-49 with HIV (Human Immunodeficiency Virus) worldwide, living there.

Private Health Spending

Territory size shows the proportion of worldwide private spending on health services that is spent there. This spending is measured in purchasing power parity.

Source: Worldmapper

[Cross posted @ Krish World]

Market and the Government

The conflicting ideologies in Economics have more or less revolved around mainly two institutions- Markets and Governments. The Capitalists believe ‘Markets’ to be the panacea for all economic problems, while the Socialists replace the ‘market’ with the ‘government’.

On Markets

Market is the institutional framework within which the act of exchange takes place or the institutional milieu which is the context of the relationship of exchange between the parties. [Kurien 1993] Thus market is an institution which allows for exchange. This exchange is only possible if one of the parties have adequate purchasing power.

Markets exclude people as consumers or buyers of goods and services if they do not have any incomes, or sifficient incomes, which can be transalated into purchasing power. People experience such exclusion if they do not have assets, physical of financial, which can be used (or sold) to yield an income in the form of rent interest or profits. [Nayyar 2002]

So, relying on markets alone will exclude a large chunk of the populace of a nation. Those with relatively higher purchasing power will benefit over those will less purchasing power. And for the former, the world will become a flatter place, as Thomas L Friedman says.

On Government

A government is a body that has the authority to make and the power to enforce rules and laws within a civil, corporate, religious, academic, or other organization or group. In its broadest sense, “to govern” means to administer or supervise, whether over a state, a set group of people, or a collection of assets. [Wikipedia]

In our formal analysis of exchange and producation, the role of social norms ( Smith proposed that market exchange is sustained by the underlying social ‘norms’ resulting frm sympathy, for example, trust in exchange, respect for contracts etc.) are left out and we tend to exaggerate on one hand, the efficiency of an abstract market mechanism based on an invented ‘auctioneer’. On the other, we tend to neglect the roles which the state could play in either reinforcing or destroying these norms which are essential for the functioning of the market economy. [Bhaduri 2002]

On Globalization

Globalization is predominantly a ‘market’ centric process.

Globalization, both then and now, has been associated with an exclusion of countries and of people from its world of economic opportunities. [Nayyar 2002]

Economic globalization challenges the political authority, which the nation state had attained by undermining gradually many of the norms of the traditional civil society.[ Bhaduri 2002]

Globalization has resulted in high growth only in a selected few sectors. [Thomas 2007]

Conclusion

Relying solely on the Government to undertake the functions of the market will lead to social unrest and will result in economic inefficiency. And government regulations are a check on the markets so that a market failure does not occur.

Can markets and governments exist peacefully’ Can market and governnment produced goods and services reach an equilibrium’ Will this result in a state, where those excluded from the market will be included by the government machinery’ Is this sustainable in the long run’

References

1)Deepak Nayyar (edited), Towards Global Governance, Governing Globalization, 2002.
2)Amit Bhaduri, Nationalism and Economic Policy in the Era of Globalization, Governing Globalization, 2002.
3)C. T. Kurien, On Markets in economic Theory and Policy, 1993.