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FREE MARKETS:Trend of nationalization and government
intervention in free markets is eroding consumer confidence.
Commies in Washington?
END OF FREE MARKETS
By Saad Sarwar Muhammad
Monday, September 22, 2008

When Pakistan’s central bank blocked foreign currency accounts to control the flight of capital to foreign banks in the aftermath of nuclear tests that it conducted, it was considered as interventionist and the measures were considered anti-economy and opposed to what free markets were all about. A similar thing happened again early this year when Pakistan’s main stock market shed more than $36 billion dollar of market capital in a very short span, the Securities and Exchange Commission of Pakistan put a floor on the points to curtail flight of money. Pakistani rupee also suffered at the hands of the flight of capital and the exchange rate fell from roughly Rs. 60 to a dollar to Rs. 78 to a dollar within a span of a few months. All these measures were criticized around the world because of the interventionist policies of Pakistani institutions who wanted to keep the economy in check.

The collapse of the investment banks like Lehman brothers and Meryl Lynch and firms like Fannie Mae and Freddie Mac along with the imminent fall of the US insurance giant AIG put the global markets in a tailspin. UK responded with a ban on short selling of stocks to arrest the fall of FTSE its main index. The US followed suit with the ban on short selling of stocks for a month. Short selling is speculative in nature with investors betting on a company’s stock to fall driving the whole market down. Even profitable investment banks like Morgan Stanley were feeling the pinch because of the short sale. The measures worked and the stock markets around the world recovered within a day with a long and wayward week coming to an end. In the process, the Fed also ended up bailing out the insurance company AIG for a big sum of $85 billion dollars and it is estimated the cost of the Fed’s intervention to the US taxpayer might amount to $700 billion dollars overall driving the domestic debt even higher to upwards of $11 trillion dollars. All these measures, with no clear and definitive answer to whether they will work or would be enough to save the ailing US economy.

All this brings to question an interesting debate of special interest to most Americans, that is, the clash of communism vs. capitalism. With the virtual nationalization of AIG and the mortgage market and the interventionist policies followed by the Fed one cannot help but feel whether the cold war ended with the fall of Soviet Union (collapse of communism/socialism by proxy) or caught on to the same country (the US, champion of capitalism and free markets) which brought about the collapse of the Soviet Union.

Economists have long argued in favor of free markets and held that intervention of the government in economy should be kept to an optimal minimum. I for one, also believe in the same thing with one exception. That is, the speculative use of instruments with techniques like short selling along with liberal credit lending can have a disastrous effect on any economy. Any use of an instrument which is speculative and where the investor has no real interest in the health of the actual company should be banned. The purpose of holding stocks is to have a share in the company’s profits and a say in its operations. The long term share holders are the only ones who really care about the future of the company. Gamblers and speculators have always bode ill for the economy and any such use of instruments which encourage these practices should be reviewed for the benefit of underlying corporations and the populace at large. Liberal credit lending comes with its own problems which become exacerbated in tough economic times of high oil prices and job losses with the result that common people start defaulting on obligations. This eventually goes up to corporation level and the companies also become prone to bankruptcy. 

The security commissions of different nations have an important job in regulating use of instruments, especially the curtailment of techniques like short selling which are highly speculative. But these measures have to be pre-meditated and should not come as an afterthought in tough economic times. Exchange authorities should be able to foresee the destructive nature of certain types of sale of securities well in advance and make them illegal. It is high time that all types of sales and uses of securities are reviewed to determine their efficacy for economy. If such measures come as an afterthought after these speculative selling techniques among others have done their damage, then these commissions risk being labeled as interventionists. Markets should be free to function in the construct of rules predetermined to work in an efficient manner. Only in this way can they be left alone in tough economic times i.e. without intervention and interference resulting in increased consumer confidence in the markets. Current trend of increased regulation and interference and nationalization (AIG) seems like the US government is run by commies in Washington.

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Saad Sarwar Muhammad has a BS in Computer Science from the University of Central Oklahoma, USA and an MBA (Finance) from the Indiana University of Pennsylvania, USA. He writes on issues related to the world economy with special emphasis on Pakistan, US and China. Other areas of interest include information technology, politics and religion. He is currently working as an Assistant Professor in Information Technology and E-commerce as a Cluster Head at NUST Business School(NBS), Rawalpindi, Pakistan.