"So combine an opaque and unregulated global financial system where moderate levels of leverage by individual investors pile up into leverage ratios of 100 plus; and add to this toxic mix investments in the most uncertain, obscure, misrated, mispriced, complex, esoteric credit derivatives (CDOs of CDOs of CDOs and the entire other alphabet of credit instruments) that no investor can properly price; then you have created a financial monster that eventually leads to uncertainty, panic, market seizure, liquidity crunch, credit crunch, systemic risk and economic hard landing (Roubini, 2007)".
Market fundamentalism purports to be a moral analysis of human activity, and as a consequence of the necessity to justify the functioning of capitalism, a variety of ethical arguments are attached to both markets and capitalism:
"Capitalism is the only system that fully allows and encourages the virtues necessary for human life. It is the only system that safeguards the freedom of the independent mind and recognizes the sanctity of the individual (Tracinski, 2002)."
The signalling of virtuous market functioning is transmitted by price structures decided on through the use of relevant information and the analysis of risk, with the concomitant effect that this has on changes in market prices over time. The precept of risk is another fundamental pillar in the moral basis of market fundamentalism, the idea that an entrepreneur undertakes to risk capital through analysing the market for a product, setting the price through use of available information on both market and product, and accepting the risk of losing capital that failure to get your calculations right may bring it is not an exaggeration to say that the taking of virtuous risk by the entrepreneur justifies by itself the profit-making underlying capitalism in this reading.
However, the entire purpose of many derivatives (and the CDS in particular) has been to separate risk from product. Risk analysis, the commodification of and the trade in risk are specifically designed to factor out this virtuous uncertainty that justifies profit:
"They mass manufacture moral hazard. They remove the only immutable incentive to succeed
market discipline and business failure. They undermine the very fundaments of capitalism:
prices as signals, transmission channels, risk and reward, opportunity cost (Vaknin, 2005)."
The development of financial derivatives throughout the period since the 1970s which have evolved to reduce risks to the minimum, the continued failure and bail-out of national and regional banking systems (Mexico, Brazil, Asia, Turkey) plus unpunished failures (Russia (several times), Argentina, China, Nigeria, Thailand) notwithstanding market fantasist belief in moral hazard must continue because it acts as an essential theological support for market fundamentalism and its corollary, market discipline. For market fantasists and those tending towards the left/social democratic section of the political spectrum alike, the sight of US, European and UK governments effectively nationalising major actors in their banking sector during the ongoing credit crisis heralds nothing less than the "end of capitalism".
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