Thursday, August 26, 2010

Baseline Scenario - Pro-Market?

I realize that being a fan of Baseline Scenario, and Simon Johnson in particular, is neither new or original in the blogosphere, so given that this is my first post, my blog is probably doomed to irrelevance, but I did want to highlight some key conceptual linkages among SJ's major reform efforts and Fair Market Principles.

SJ's coverage of the Too Big To Fail issue in our financial system is a prime example of pushing for fair markets. Where the regulators, and the Frank-Dodd bill, recommend an array of rules and disturbances for large banks, Baseline Scenario maintains that the best way to promote the future health of the financial market is to alter its current structure. Of course, the current structure is a product of regulatory evolution, that has nothing to with what a "free market" might yield in either optimal, or simply other, circumstances, but this subtlety would never stop someone who stands to lose from a break-up of big banks from accusing SJ and his proposals of being opposed to free markets.

This strikes at a core concept underlying Fair Markets: that just because a market is - the way it is, how it is, who is in it - does not mean that we should assume that market is either free or competitive and therefore leave it be, free from disturbance. Rather, all efforts regarding market intervention should be premised on the concept of addressing underlying flaws in the market structure, and concerned primarily with improving the marketplace for the general benefit of participants. Clearly a more fractured marketplace of lenders would a)reduce prices for clients b) allow smaller banks to compete on even footing c)reduce the risk to the taxpayer of having to pay for massive failures.

A more fractured marketplace would in turn require less regulation and less oversight, and thus be closer to what one would describe as a competitive and fair market.

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