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March 24, 2008
So the freedom loving financial markets who that that the market is always right and government regulation is always bad are clamouring for public funds to rescue the U.S.and UK financial system. Of course, whilst they hold their hand out they continue to say that market flexibility and open competition are the most reliable safeguards against cumulative economic failure.
Steve Bell
In this column in the New York Times Paul Krugman argues that:
Wall Street chafed at regulations that limited risk, but also limited potential profits. And little by little it wriggled free — partly by persuading politicians to relax the rules, but mainly by creating a “shadow banking system” that relied on complex financial arrangements to bypass regulations designed to ensure that banking was safe.
He says that as the years went by, the shadow banking system took over more and more of the banking business, because the unregulated players in this system seemed to offer better deals than conventional banks.
And adds:
The financial crisis currently under way is basically an updated version of the wave of bank runs that swept the nation three generations ago. People aren’t pulling cash out of banks to put it in their mattresses — but they’re doing the modern equivalent, pulling their money out of the shadow banking system and putting it into Treasury bills. And the result, now as then, is a vicious circle of financial contraction.
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