The end of free market fundamentalism not of the mixed economy

Government controlled banks remove capitalistic excesses but impose their own problems. Politicians face short-term political constraints. If politicians rule over capital markets a new inefficiency will develop reflecting the core reason economists reject socialism. Looking at the current Australian scene, for example, disastrously inept and wasteful government investments in “green car” technologies and “Food Bowl” projects offer no encouragement that government run banks would outperform private banks.

There is a rethink of the role of government. US wages have stagnated over recent decades while incomes to top income earners have grown strongly. But the US is an outlier in its respect for FMF and regressive tax cuts. This bias may be removed by Barack Obama.

The move by the US government to provide $25 billion handouts to the US automobile industry represents a trend towards increased government involvement. These grants are conditional on objectives of “fuel efficient” cars but a poor move given long-term pressures that work against mass manufacturing in the US. It is just wrong to foster poor performers.

The intervention with respect to banks may be seen as a precedent for increased government involvement in health, education, transport along with restrictions on free trade and investment. Such restrictions would endanger living standards and keep millions in developing countries poor. It also denies residents in developed countries inexpensive products. We must learn from the current crisis and adapt regulatory settings not “shoot ourselves in the foot” with restrictions that reduce our freedom and build inefficiencies into the economy.

Society will change as a consequence of the crisis and incentives for “get-rich-quick” schemes through borrowing will be diminished. There may be a return to older values of “living within means”. There will also be less economic complacency - we may become more cautious. This increased caution has costs and benefits.

Finally, the discipline of economics will change as it did after the Great Depression. Specific changes might include a reassessment of credit derivative contracts. There will be a rethink of financial regulation especially international regulation. One reason for the current problems is the competitive pressure not to regulate domestic monetary sectors arises because of the chance to operate in less regulated international markets. The regulation of international financial markets will be heightened by the expanded role of China. These issues will play an increasingly role and the way they evolve will be linked to the damages the current crisis causes.