[Free Market] Logic?

I’ve sat working in bed, had a very early night, pottered in the garden, mopped the floor, cooked fiddly things and sat in front of my computer. These seem like great opportunities for thinking, but I am yet to have a clear sense as to what I want to say in supervision tomorrow when it comes to working out plans for finding a second supervisor or committing to a particular focus through which to look at my research questions. Perhaps if I trick my brain into working by writing a quick post it will then continue onto more essential tasks?

 

There are some interesting word choices being made when it comes to promoting changes to banking on the ALP’s website. I was most interested to see the change being promoted as ‘A competitive and sustainable banking system’ (my emphasis).

Following the theme of economic systems, there is an interesting article on the New York Times website focusing on clearing houses for derivatives. ‘The secrecy surrounding derivatives trading is a key factor enabling banks to make such large profits.’ This is because buyers and sellers have no idea what cut is being taken. An electronic exchange could increase the availability of information, but the article suggests it has been killed off to protect the profits of big players. The article unpacks some of the issues around governance structures and I was most interested in these two paragraphs

Critics now say the banks have an edge because they have had early control of the new clearinghouses’ risk committees. Ms. Taylor at the Chicago Mercantile Exchange said the people on those committees are supposed to look out for the interest of the broad market, rather than their own narrow interests. She likened the banks’ role to that of Washington lawmakers who look out for the interests of the nation, not just their constituencies.

“It’s not like the sort of representation where if I’m elected to be the representative from the state of Illinois, I go there to represent the state of Illinois,” Ms. Taylor said in an interview.

Well, as I understand it, in a representative democracy the representatives must seek a mandate from their constituents at each election (with what counts as a mandate dependent on the electoral system). Are we saying that the people making the rules for these markets should seek a mandate from their banks? Surely if people are self interested enough for economic theory to be useful this is not such a great idea.

So is this a ‘moral hazard’, or does a market system need a point at which it is run in an anti-competitive way to give the appearance of stability (after all, derivatives are about insuring against risk right?).

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