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Business  World Business What critics say the recent U.S. intervention in the economy, credit market in the U.S. began experi
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What critics say the recent U.S. intervention in the economy, credit market in the U.S. began experi |
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Friday, 03 October 2008 |
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There is hardly any people believed in the principles of free market economy that can not see with interest and with a great deal of criticism about recent developments in the U.S. economy. What happened in recent months the U.S. has nothing to do with the principles of free market and can most easily be described as granting social benefits for Wall Street.
In the last year in the U.S. credit market started experiencing more and more difficulties.
Uncontrolled granting mortgages to people who can not afford these, and their "packaging and selling on world financial markets, lack of transparency of the process and wrongly Rating as investment grade bonds made the avalanche of problems for financial markets Which has caused the bankruptcy of two of the shirt of the U.S. financial system - Bear Stearns and Lehman Brothers.
Starched Mortgage system - Fannie Mae and Freddie Mac, mortgage guarantee trillion dollars and create the basis of the U.S. housing market were in extremely poor condition and the government intervened, as virtually nationalize giants and assumed their duties.
Like was the case with AIG, whose financial situation was so bad because insurance risk financial instruments with high credit ratings unrealistic that the government intervened again and support the insurer for its important position in economic life of the country.
Currently the U.S. Congress debated the new proposal of Finance Minister Henry Paulson injection of € 700 billion dollars in the system and buying some of the most problematic securities in order to support the financial system.
In all these cases politicians out arguments with an "alternative was worse;" if we do not act now, the problems of the financial system will be detrimental to the entire economy , one U.S. senator, quoting Bernanke said: "Banking system is arteries of the economy. Currently arteries are blocked, must act quickly, otherwise the patient can get a heart attack.
But what if no alternative is worse? What if the most correct way is self-marketing?
People protecting these arguments have to turn the words "Ethical danger" (Moral Hazard). Moral hazard represents the fear that if the government granted save banks, companies or institutions that will cause others to expect such assistance to encourage them to take unreasonable risks.
The problems of the U.S. economy in recent years were not due to lack of government intervention (as this is not less need for regulation of certain financial markets, for example, so-called credit default swaps, the lack of which undoubtedly led to worsening crisis ), But - due to excessive state involvement in the financial life of the country.
Let us look at some of the main culprits Mortgage crisis and real estate - Fannie Mae and Freddie Mac. They MORTGAGE buys from smaller banks and mortgage traders and they "packaged" in contractual issues and resold on financial markets. This practice was very good for U.S. economy countries. The existence of Fannie and Freddie facilitate access to cheap mortgages and so many people were able to buy homes. Mortgage well-oiled system easier access to loans of almost all U.S. citizens, and this was one of the main engines of economic growth.
Those who buy and sell bonds of Fannie and Freddie (investment banks, including major players were Lehman Brothers and Bear Stearns), although they knew that two private institutions have had informal assurances from the U.S. government to "guarantee" of bonds. Thus, investors received a higher yield than government securities at seemingly the same risk investment, because these bonds are guaranteed by the government (albeit informally).
Not only the partners of Fannie and Freddie, but their managers expect that in any crisis the government would intervene. Namely that implied government intervention of the two private corporations (aimed in irony, creating stability and confidence), encourage them in taking risks. Regulations were stringent and quality of mortgages sacrificing their volumes because the government "backs" guaranteed market for them.
Since the Federal Reserve allow only bonds of Fannie and Freddie to be betting against low-federal loans that allow both companies to draw virtually unlimited credit and create colossal debt. Receive one big "carry trade", which made the obligations of the two huge mortgage companies.
Together, Fannie Mae and Freddie Mac had a capital of 83.2 billion at the end of 2007. This fund supported debt of 5.2 trillion. dollars. Thus, the debt to equity was 1:65. Even people outside the economic profession, it is clear that a private company that is extremely large debt and is extremely risky to operate on such condition. However, both companies had the highest credit rating - AAA.
Exactly implied support from the government establish a "moral hazard" of excesses.
This, though to a lesser extent, important and major financial institutions (some commercial banks, investment banks and insurance companies), which was said to have been "too big to go bankrupt. Risk-taking and carcass debt was facilitated and companies began to recklessly chasing profits.
On the other hand, systematically lower rates by the Federal Reserve (as in Greenspan, by Bernanke) made easy access to loans. In the U.S. system was much cheaper and money. Value at which investment bankers running was extremely high. The reason for the low rates was panic and fear of recession in every problem is government intervention by injecting liquidity, interest rates and weigh practically printing money.
"Discount" Acting money to another level - balloon inflate prices and housing and savings melt. Neither a central banker and not a politician, would not reduce consumption and make it difficult for businesses (in understandable reasons), which limit liquidity would make. Systematic injection of funds into the system, however, stimulate consumption and reduce incentives for saving, which then blowing price bubble and thereby increasing debt of the U.S. economy.
That avoid short-term recession, but it "push" forward in time with the potential to become more serious in the future.
Recent actions of Paulson and Bernanke justified expectations of the business. In practice risks incurred by investment banks, were at the expense of taxpayers and profits - for a handful of people on Wall Street. This page from the economic history of the United States will remain the nearest experiment (present) of America with socialism (and only a handful of rich investment bankers).
But let's take a minute to investigate "detrimental" alternative of inaction of regulators. Yet many experts identified the problem as such, but the comment that government intervention is the lesser evil in the case defending Paulson and Bernanke.
Alternatively, of course, is to leave the economy to fall into recession. But so is a bad recession?
Recession is normal and positive (in most cases). They cleared the financial system, adjusted the prices of assets and punish poor and inefficient enterprises with bankruptcy. After the recession the economy starts anew and clean. They are the natural regulator of a market economy.
According to some experts, including lack of a regulator is one of the reasons for the economic collapse of the Soviet Union. During totalitarianism even inefficient enterprises are not closed because of ideological or other reasons. They were systematically supported by the government and finally the system is filled with inefficient economic agents .
But this is a play, some will say, referred to the great importance of the financial system. However, banks are not ordinary factories. This undoubtedly is.
But if the most powerful economy on earth is placed on your knees by the bankruptcy of several investment banks, which is losing scored world in a global recession, it undoubtedly has drastically reorganizing. In that case, a more severe recession may not be so bad alternative, if clean and reorganize the system.
Let me make a brief review of the present government interventions. With its decision to support Fannie and Freddie U.S. government debt doubled in one week since added more than 5 trillion dollars debts which had two giant. Cease injecting liquidity into the system has other negative effects - reduced dollars, which practically makes the American people more humbly. Great debt and willingness to use printing money again reduced confidence in U.S. debt securities and may make it more difficult for America to finance consumer habits in the future. In many cases (such as with AIG) decision of the federal government to intervene actually submit further panic in the markets and customers of AIG in Singapore started liquidated its policy.
But perhaps the most serious problems that non-market policy will be "moral hazard" from away "golden parachutes". Instead the market to punish heads of banks and incompetent businessmen with bankruptcies, the government saved them, as in the case of Bear Stearns leadership does not even have to return big bonuses for 2006 and 2007 What causes the crisis is precisely what the U.S. Regulators now prescribe as a remedy for it - more government guarantees and more cheap money.
Will soon become clear whether the recent interventions of the U.S. government will be crowned with success or not. Until then, there's no way to know if Paulson and Bernanke will go down in history as financiers with vision and sober assessment or as myopic and incompetent officials, but one thing is sure - free market principles and capitalism borne crusher in recent months and particularly by their primary defender and proponent - the United States. |
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