Tuesday, November 8, 2011

Markets as Lords or Servants

It is very hard especially without committing full time to it, to watch and understand what is developing in Europe today. One outcome is clear though. Markets are bad masters. We want them as servants but along the way we became confused (no thanks Milton Friedman) and they seize the opportunity to become lords.

I just came from reading a article in the WSJ of how Germany is benefiting from the crisis. It is enjoying a ridiculously low cost of funds as a safe haven. Meanwhile Italy is tottering to fall into the abyss.

Markets in aggregate sort out winners and losers. This is fine if there are realistic and fairly quick ways for losers to catch up with the winners. When Markets are masters, there aren't any easy avenues to achieve this. All its energies is focused on finding winners with losers are just collateral damage. No hard feelings as they say. It is the meritocratic and/or legal.

Markets as servants suggest that governments must run ahead of the markets with laws to redirect market directions toward social and political ends in a way that inspire confidence. Few if any governments are perceived to be sufficiently astute to pull this off. The problem here is perception and not reality. Trouble is in today's world, perception is reality.

Therefore what is important to return Markets to their servant hood is that societies must forge a new compact. This slow to happen because today's winners do not just have the finance, but also have decisive influence over political power. It doesn't help that 'Occupy Wall Street' isn't united. These are early days. The days of pain are likely to be long.

Stay alive.

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