The report discusses the many flaws in organized financial markets but concludes that these markets should continue to operate on principles of initiative or creativity and with a reasonable amount of government regulation. While greed may be part of the cause of financial market instability, naivety and delusion contributed as well. Innovation in computer technology coupled with the work of Black and Scholes in options pricing gave rise to the modern derivatives markets.
(Greed-and fear A special report on the future of finance) Natural selection happens in financial markets where companies are constantly changing to the latest product, i. e. retail banks began to focus on investment banking, and investment banks moved into the arena of hedge funds. The report calls into question the new form of financial market regulation. A major area of focus of the report is what factors lead to the boom and bust market cycles that lead to financial instability.
The report describes three concepts, globalization, liberalization, and technological innovation as triggers of market booms, busts, and financial instability. (Greed-and fear A special report on the future of finance) This paper responds to each of these ideas as set forth in the report. Globalization According to the report globalization embraced by emerging markets along with low inflation in developed markets made credit grow more quickly and easily.
(Greed-and fear A special report on the future of finance) However, as the markets are today, developed countries such as the U. S. and the U. K. are in near to full blown inflationary economies. Most global markets are exposed to the U. S. subprime crisis. (Caruana) However, many emerging markets can limit their exposure to the crisis by managing their levels of greed and fear. Greed is limited when these emerging markets do not invest in the derivative securities created by the subprime markets.
Fear is managed when countries utilize resources such as the International Monetary Fund, the IMF, for lending facilities that will serve to shore up a country’s credit needs and support the county’s banking and financial institutions’ lending and business investment activities. Liberalization Liberalization in terms of relaxing or reducing banking and financial industry regulations in countries such as Japan and the U. S. has led to property value booms and bubbles which are followed by a bust cycle and finally financial instability.
(Greed-and fear A special report on the future of finance) It can be argued that greed, particularly in the U. S. , led to a relaxation of banking and financial industry regulation in order to facilitate greater innovation, liquidity, and credit availability in the financial markets. Hedge funds are thought to provide great efficiency, liquidity, and returns in U. S. capital markets. Industry regulation, therefore, should have served to facilitate innovation in the hedge fund industry while protecting it from a financial crisis. (Bartiromo) This, however, was not the case.
Widespread fears, both speculative and proven, about decline in assets values caused the federal government to step in with a new level of financial liberalization through bank ownership. Previously regulation was intended to provide a legal framework in which the financial markets could operate. The current level of fear has changed the goal of regulation and extended the methods of regulatory activity to include providing financing and operational assistance or mandate to the financial markets. Innovation New technology industries are thought to create the need for specialized types of financing.
(Greed-and fear A special report on the future of finance) This concept may work in a normally functioning economy. However, one can look at the alternative energy market to see that this concept is not working in the current economy. Industries like energy technology are capital intensive. Newer, more capital intensive industries generally depend on financing from private equities and hedge funds. (Alt-Energy Firms Sink With Prices, Credit; New fuels) Prior to 2008 fear caused the hedge funds and private equities to invest less in capital intensive industries.
More recently as many hedge funds disappeared due to insolvency, this designer type of financing is no longer available to new technology industries. The only existing sources of financing available to energy technology, particularly in the U. S. , is government investment or financing from financial institutions in which the U. S. government has a financing or operational interest. Conclusion – the results of Greed and Fear Greed and fear has led to current regulatory practices in which many governments are now owners of many financial institutions as opposed to simple regulatory agencies.
The new trend in globalization will be that central banks in both developing and emerging market countries will manage their countries financial markets and systems in a way that will limit exposure to booms and busts in international markets. Once more governments develop controlling interests in banking and other financial institutions the original liberalization referred to in the report should return and these institutions will be able to re-create innovative financing. Governments will regulate these institutions on two fronts – as shareholders and as policymakers.
As owners of banks and financial institutions, governments will also become investors in new technologies such as the clean energy industry. Where hedge funds and private equity firms no longer exist at previous levels, new technology firms will look to government equity as a viable alternative form of financing. Works Cited “Alt-Energy Firms Sink With Prices, Credit; New fuels, technology less competitive now, financing more scarce. (FRONT PAGE NEWS). ” Investor’s Business Daily (Dec 2, 2008): A01. General OneFile. Gale. 19 Apr. 2009. Caruana, Jaime.
“Viewpoint: A Significant Test Of Emerging Markets – Taking A Global Perspective Is Vital To Learn Lessons From Financial Market Turbulence And find The Right Approach To Move Forward In The Future, Says Jaime Caruana. (Viewpoint essay). ” The Banker (Nov 1, 2007): NA. General OneFile. Gale. 19 Apr. 2009. “Greed-and fear A special report on the future of finance. ” The Economist 24 January 2009: 1-15. Bartiromo, Maria. “Straight Talk from the Fed; New York Federal Reserve President Tim Geithner on housing prices, regulation, and the post-Greenspan era. ” Business Week Online (May 4, 2006): NA. General OneFile. Gale. 19 Apr. 2009.