Are Free Markets Non-Functional These Days?
“It is the failure of free market only that has led governments of various nations (including the USA) to resort to nationalization of banks and other financial institutions. ”
A free market is characterized by price discovery and liquidity. In addition to these two it also plays a major role in capital allocation. There are buyers and sellers in the market. Both of them indulge in financial dealings and this results in an efficient market.It is these financial transactions that also determine the prices along with their fluctuations every minute. The highest bidder walks away with the capital, which he utilizes to earn even more profit. It can be said that to every seller there is a buyer and somebody’s loss is someone’s profit.
In the present time of economic crisis, the free market has to bear a lot. Some people naively believe that the current downturn in the economy has only affected the investment and retail banks the most. On the contrary, the concept of free market has failed almost in its entirety.
It is the failure of free market only that has led governments of various nations (including the USA) to resort to nationalization of banks and other financial institutions.
In the past few months the price charts have been so erratic that they have baffled even the most intelligent minds. The assets in the market could not be gauged even with lax precision and nobody could (or can) say with certainty as to what is the correct price of commodities and stocks. It seems as if anarchy has set in the free market because the prices have become highly volatile.
Every kind of mathematical and economic model has failed. Be it risk, portfolio management, insurance etc. all the sectors have gone awry. It can also be said that the liquidity in the entire free market has dried up. Even when the government and other big financial institutions have pumped enormous amount of liquidity in the market, the results have been far from satisfactory.
The current position is that despite some signs of recover in the economy, the unemployment rate is to remain at an all time high for a considerable time to come. Rather, even now big companies often resort to dismissal of employees in large numbers.
In a nutshell it can be said that the existing precarious economic situation is a result of wrong policies adopted by major banks of the world and such policies are now being replaced by sensible things and damage control measures.
Author - DeeKay
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