When Free Markets Fail
This week, I read two really great articles on the current public policy response to the credit and suprime crisis that I would like to share. First, an article from Businessweek which helps to put the recent Fed moves to provide liquidity in context. We’ve been seeing some unprecedented decisions by Ben Bernanke and the Federal Reserve over the last few months and it can be a little confusing for people. This article does a great job to clear some things up.
Next, a really great article from Bloomberg.com documenting the many times when the US government has stepped into the market in order to quell panic and hopefully avert economic disaster. It would seem we have a long and storied history of incomplete support for the free markets. But, sometimes, despite what even the most laissez-faire of us think about the markets being able to sort our problems on its own, we need to act to bring support in the short term.
And, for a final investing lesson, these two articles bring up a few very interesting points about investing in addition to giving you a look into the effects of macroeconomic policies. As you can tell, the government typically acts swiftly and decisively to quell tumbling markets. In addition to these non-free market actions, the markets also have built in circuit breakers to stem the tide of particularly vicious draw downs, yet no circuit breakers for similarly bullish upswings. This just goes to reinforce the belief that the markets have a strong upward bias. As an investor, you must always be aware that many of the rules and supports for the market create hospitable environments for over valuations and bubbles. It’s your job not to get caught up in the euphoria.
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