Friday, September 26, 2008

Myths and Realities of the U.S financial crisis

There is a financial crisis in the U.S. and we are hearing the same old silly arguments. Apparently, in the last few weeks capitalism has collapsed, Bush has become a socialist and it's all the fault of the World Bank and the IMF. If you belive any of that, you should really update your feed reader.

But if your concerns are more serious, the ever impressive Ajay Shah does some myth busting:
Myth: Governments are bailing out rich people. 
Reality: Acute pain is being inflicted on shareholders and top managers of financial firms.

Myth: unregulated hedge funds are dangerous.
Reality: The unregulated hedge funds were fine. The problems were created in the heart of regulated finance, in banks giving out home loans.

Myth: The crisis has demonstrated the failure of financial capitalism.
Reality: Financial capitalism has delivered $50,000 per capita of GDP in the US.

Myth: This is the failure of laissez faire ideology in the US
Reality: The US ‘Federal Register’ publishes over 50,000 pages of new regulations every year. Regulatory expenses rose 44% from 1990 to 2008 in the US. US financial regulation is far from laissez faire! What failed was dysfunctional governance structures.

Myth: The crisis has demonstrated that credit derivatives are dangerous
Reality: The crisis has demonstrated that OTC derivatives are dangerous.

Myth: Innocent bystanders have got hurt because of the shennanigans of millionaire rocket scientists. 
Reality: US GDP is doing surprisingly well.
The above is based on slides (PDF here) from a talk Ajay delivered on the financial crisis. Obviously, it would have been better to hear the man speak along with the slides. 

The presentation goes into broader range of issues and well worth a look for anyone trying to understand what went on in the financial markets. 

1 comment:

kalusudda said...

Yes we have already forgotten about that gallon of Gas is $4.00 and highways are crowded as ever!(There was a lull a month or two ago) Shah is great with facts yet something is missing there! (Hey I am no economist! But saved closer to a .75 mil on a house!) But McCain got hit!