Commies in Washington?: Economistan

FREE MARKETS:Trend of nationalization and government intervention in free markets is eroding consumer confidence.

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.

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