Conundrum of Financial Markets: Measuring Risks and Mapping Regulation

Abstract

With the free world of capitalism beset with stagflation in the late 1970s, the thrust in economic policy was on liberating the markets for regulations and controls. Adam Smith was resurrected and the “invisible hand” was given much freer hand. The postwar experience of the Bretton Woods the world over demonstrated beyond doubt that enlightened free markets are superior to regulation, controls, and planning. Even the supercomputers cannot gauge what the market can, because the markets have the feedback loop which the planning apparatus even with the best technology and computing power cannot replicate efficiently as the market. Since the early 1980s Thatcherism and Reaganomics drove the political economy of the USA and the UK and also influenced Europe and the emerging market economies toward much stronger free market philosophy. This debate over free market was essentially related to the industries covering goods and services and its efficiency in the allocation of physical and financial resources. Unfortunately, the market fundamentalists hijacked the free market argument and philosophy to be extended also to the financial services industry. The case for free markets for more efficient allocation of resources for maximizing consumer welfare and societal good is well taken. And it is preposterous to extend the same argument for the financial markets and also financial services industry.