Policy Paradoxes in the Financial Meltdown

by Chris Sturr | February 01, 2008

This posting is from James Miehls, a grad student in economics at UMass-Amherst and a member of the D&S collective.

The financial meltdown has left us with a paradox of possible policy applications. It seems that any action, be it fiscal or monetary has the potential to both “fix” the current problems in the financial markets, or to make them worse.

What is being ignored in all the coverage of the housing and financial market meltdowns is the issue that the future is fundamentally uncertain. Sometimes the past is the best predictor of the future, and sometimes it is not. Downward (and for that matter upward) spirals in markets only happen when investors believe that tomorrow will follow the pattern of today. The economy is affected by far too many variables to be isolated into a cause and effect model. The best way to stabilize the current financial crisis is to ignore the market impact, and intervene only in the areas where the social impact makes a lack of intervention inhumane. It is not high salaries of executives, opaque risk hidden funds, or investor ignorance that are causing the problem; it is a lack of foresight that is inherent in a capitalist system. The only real alternative is to leave the chaos of capitalism be while using the government to protect the hardest hit of the victims. We can only hope that eventually the chaos of capitalism will become so far out of control that a complete social overhaul becomes necessary.

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