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In defense of the maligned market

By Geert De Lombaerde Posted on November 6, 2009 at 9:18 am

NYU professor Viral Acharya says we need to be careful when we talk about the financial crisis being caused by ‘the market’ failing to function properly. Regulators are there to patch up holes and prevent problems, he says, “but regulation also reduces market discipline” by introducing distorted incentives.

For instance, insured depositors are unlikely to “run” but they also freely deposit at the highest-yielding bank, not worrying about its credit risk. Thus, when regulators deem a bank as well-capitalized, the onus is on regulators that this be right. Markets may not have the incentive to gather this information nor possess the details of regulatory supervision that led to such an assessment. Conversely, when regulation allows itself to be arbitraged, the financial sector becomes more opaque exposing markets to unexpected outcomes.

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One Responses to “In defense of the maligned market”

  1. E, Henry Schoenberger writes
    November 7th, 2009 11:45 am

    This is just garbage. The SEC and the Fed did not enforce existing regs - see sections on 10b-s and more than 1500 page of regs for Bank Holding Cos, regs that were severely violated - regs which have the force of law behind them. His ludricious lack of knowledge clearly reveals that his theories are based on the self-serving ethics of Financial Darwinism which my new book - “How We Got Swindled by Wall Street Godfathers, Greed and Financial Darwinism.” He refers to “markets” as if they have a mind of their own unrelated to their substance which is nothing but a collectivity of human beings and humans do not have must historical support of rationality - so his argument rest on the self-evident fallacious notion that “market” are rational - which is just plain dumb -and the Chicago School which spawned this toxic virus is Viral’s fundamental virus as well. What does regulation arbitrage mean - what were the explainations behind the fact that the “too complex to explain” innovative, contrived to generate swine fees financial products - that Greenspan admitted to not understand. And if any security can not be explained well enough to be properly understood then it is illegal to sell it. Viral may have a Phd and do something at NYU but keep in mind Phd stands too often for piled higher and deeper! I am outraged that we still listen to appologists for greed and accept their excuses based on denial aviodance and just plain ignorance as making sense. Viral has the virus and has not replaced what he has wrongly thought in the past with a renewed awareness of reality, based on all the empirical evidence. e henry schoenberger

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