A Realistic Analysis of the Market Oriented Capitalist Economy
New Directions in Post-Keynesian Economics series
Chapter 2: Alternative theories of the operation of a capitalist economy
The financial crisis that began in 2007–2008 started as a small default problem on some subprime mortgages that had been issued in the United States. These defaulting subprime mortgages were part of the mix in mortgage backed derivatives. As a result, holders of these derivatives began to fear that the mortgages in their specific derivative financial asset holdings might also soon fall into default. Consequently, many derivative asset holders tried to make fast exits from the markets for such assets as the fear of potential defaults spread. With many holders rushing to exit the market while few or none were willing to buy more of these assets, the market prices of derivatives crashed. The result was to reduce the asset side of balance sheets of institutions that held these derivatives to the point of insolvency. This effect quickly ballooned globally into the largest threat to economic prosperity since the Great Depression. What is rarely noted is that the origin of this latest global financial market crisis, like the New York Stock Exchange crash of 1929 that appears to have precipitated the Great Depression, is associated with the operation of free financial markets unhampered by government regulations. In recent decades, many mainstream academic economists, central bankers, most policy makers in government and their economic advisers have advocated freeing financial markets from government rules and regulators.
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