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ShareThe sub-prime crisis in the United States seems to have been brought under control, and hope is afloat that the looming American recession can perhaps be kept at bay. After momentary intellectual depression and panic over the fortunes of a choppy financial markets, the free trade economists seem to be lapsing into complacency and once again declaring that the state should be shooed away and the market be left alone to fend for itself. But there is a certain intellectual dishonesty at work here, which needs to be pointed out. The unpalatable fact is that the state through the Federal Reserve has stepped in to prop up investment bank, Bear Stearns, from total collapse, by facilitating JP Morgan to buy it out. The Federal Reserve did what it did because otherwise there would have been a veritable market crash. It is surprising that no one has batted an eyelid at this counterintuitive truth staring them in the face.
It is not for the first time that the Federal Reserve had done a market salvage operation. Ten years ago, Long Term Capital Management (LTCM), a hedge fund, which had 1997 Nobel Economy prize winners Myron Scholes and Robert C Merton among its board of directors, had to be bailed out by the Federal Reserve Bank of New York because its collapse threatened to pull down the financial market. The exciting story of how the then Fed chairman Alan Greenspan arranged the dramatic emergency meeting of the financial honchos to save LTCM is the stuff of financial thrillers. The present chairman, Ben Bernanke, had orchestrated the rescue operation of Bear Stearns in a more subdued manner.
There was a slightly different kind of a salvage operation in India in 2001 when the trusted Unit Trust of India (UTI) was in deep waters because of the cavalier way in which public funds were used by private companies to participate in stock market operations. The government of the day apart from ordering the customary probe had to arrange for the funds to be pumped in as well.
The critics of capitalism from Lenin onwards have used every economic crisis to predict the end of free markets as we know them. But the markets had been resilient and there was an inexorable upturn after every nosedive. What we are witnessing is a more complicated phenomenon. Economists and other experts need to explain the strange and symbiotic relationship between state and market.
It has been fashionable since the Reagan-Thatcher days to denounce the state as the enemy of the market, and how the market's fundamental rights have to be defended from a tyrannical and zealous state. There was even the apocalyptic prediction that the state would now be overtaken by the multi-national corporation (MNC). Somewhere, the enthusiasts of capitalism appear to less than enlightened. Even that most successful MNC, the East India Company, had to cease its commercial operations as it grappled with the governance of its newly acquired dominions in India. So, there is that old-fashioned thing called the division of labour at work. It is true that free market is a better creator wealth and wellbeing than the state could ever be. But when the market falls sick, then it needs a physician of sorts. The self-healing mechanisms of the market do not seem to have evolved in an adequate manner as yet.
This need not be an endorsement to those who argue that the state should manage the economy. That it is a disaster is established beyond doubt. But the market cannot be on its own. It needs regulation as well as emergency first-aid.If the state comes in handy to save the market in times of trouble then there is need to revise the models of explanation.
Email: r_parsa@dnaindia.net
