Charles Edison

"Economics, politics, and personalities are often inseparable." - Charles Edison

Monday, February 6, 2012


Many believe that the market failures are the reasons for our drastic economic problems. But markets don’t “fail.” They respond rationally, quickly and often brutally to the conditions in which they are in. If they see a shortage of supply or an excess of demand, they’ll drive prices higher. Conversely, excess supply or falling demand drives prices lower. If you’re looking for someone to blame, examine why supply is constricted or inflated or why demand is stifled or encouraged. But don’t blame the markets for responding accordingly. For example, the onset of the financial crisis three or four years ago was largely due in the US and the UK to excessive demand for mortgages from people who couldn’t afford them. In the US, this was driven by government mandates to Fannie Mae and Freddie Mac to do just that – pump up demand for housing. In the UK, tight restrictions on construction limited supply to a market that quite rationally came to believe home ownership was a sound substitute for more productive investment. The logical response by the markets was to divert money to housing, just as the politicians wanted. As soon as this folly became apparent, the banks bailed out as did the humble folk queue outside branches of Northern Rock, much to the dismay of policymakers. This is why I believe in the strong theory that no market is at a failing point but yet the harsh societal conditions don’t allow for a market to become anything more than a failure.

1 comment:

Peyton Moore said...
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