The current ciris is in finanacial markets and tooted in sub-prime
mortages, as we all know. First of all, the money market has severe
govt intervention for several decades when fiat money was invented and
standard was abandoned.
Some centuries ago the currecy were issued by banks backed by their
gold or other assets. Hence the original name : bank notes. Govts all
over the world 'nationalised' the currecy issuing system and established
Central Banks with sole monopoly over issue of legal tender. This is first
of all certainly not free market in the real sense.
Secondly, the chronic defict financing of all nations over decades
pumped in more money into the sytem than the sytem could absorve
thru growth in real GDP. This is true of most economies.
And US is in a unique position : its currency USD is the reserve
currency and most of world trade occurs in USD. And hence the
entire world funds the US deficts which is in trillions and trillions
over the decades. US govt prints and pumps in trillions and
trillions of USD into the world economy over the decades. The
cumulative effect of all this should be taken into account while
blaming 'free markets' alone for all this mess.
I vividly remember our discussion about value and money ; and
about the functions of money : as a medium of exchange, measure of
value, etc ; Especially the function : 'store of value' ; The accumulated
'surplus values' or capital or whatever the term flows all around the sytem
in search of investemtn avenues and good return on investemnts.
As the term value is tricky to define and contantly fluctuates in
currency and debt markets, the cumulative effect of too much money
chasing too few goods or avenues for investment seems the crux of
The old deficniton for inflation : "Too much money chasing too few
goods" : This seems to aptly apply for this financial market mess.
Combined with the govt gurantess of the twin giants for many trillions
(Freddie and Fannie), etc.
The word cheap money, easy credit, easy money, etc are all result of
this too much fiat money ? And as the govt is the both the issuer of
money and lender of last resot, it also controls the effective interest
rates by tinkering with Fed rates. All these are certainly govt intervention
and not free markets. Last year i read in major papers that the world
boom in equity and real estate is a function of global liquidity. Means ?
Excess liquidity ? And cyclic asset bubbles are always regular
happenings. What about the net amount of M4 or legal tender that
exists in the world economy at any given moment ?
The crisis is not in manufacturing or other services. Hence to term
all this as the failure of free enterprise capitalism is pre mature.
Anyway, I guess no one wants to get back to socialism. In US no one
seems to re-establism the, say : ICC (Interstate Commerce Commission)
which throttled many sectors like trucking (like our license raaj in India
as on date).