Friday, May 23, 2008

The Great Unravelling

In this brief two page article, Jayati Ghosh of Nehru University exemplifies pithy profundity;
The financial liberalisation of the past two decades across the world was based on two mistaken notions. First is the "efficient markets" hypothesis beloved of some economists and many more financial players, which asserts that financial markets are informationally efficient, in that prices on traded financial assets reflect all known information and therefore are unbiased in the sense that they reflect the collective beliefs of all investors about future prospects. Second is the notion that financial institutions, especially large and established ones, are capable of and good at self-regulation, since it is in their own best interests to do so. And therefore external regulation by the state is both unnecessary and inefficient.

Both of these presumptions are now in tatters, completely destroyed by the waves of bad news that keeps coming from the financial markets, and by the growing evidence of foolish and irresponsible behaviour that was clearly indulged in by large and respectable financial players. It has emerged that unreliable behaviours is not the preserve of a few relatively small fly-by-night operators, but is endemic even among the largest private players in the financial system.
About here is where I'd invoke Jay Hanson's merciless critique of economics as the province of professionally trained liars for the elite. Not because I think Professor Ghosh was untruthful, rather, because it's clear that he by no means went far enough in his assessment of the pushme/pullyou relationship existing between elite financial institutions in a current state of freefall, and the allegedly independent machinery of governance that's supposed to independently and objectively regulate and govern the aforementioned financial institutions. It's a short read - check it out and tell me what you think is left unsaid - if anything - in the great unravelling?