It is not very often we see two crisis at a global level. I haven’t seen such times when we are seeing both financial crisis and food crisis happening together.
Though, the policy responses for both has been really different. The financial markets/experts have given a big thumbs up for all the Central Bank and government intervention but have given a big thumbs down for the government intervention in the food crisis.
The interventions in financial markets are justified as it could paralyse the entire economy but if given for food then it is said it leads to market distortions/against free-market philosophy etc.
This is actually double standards at its best. Any intervention leads to distortions be it any market. For instance, bailouts of Bear Stearns and Northern Rock though justified as important it leads to issues of moral hazard and is against the philosophy of “survival of the fittest”. In 2001, several large firms were shown the door but smaller firms in finance are provided the support.
So, it is true that the various interventions by several governments (I have highlighted a few cases here) will not result in the desired benefits, but so is the case with finance. The central banks have pumped in huge liquidity but it is seen that firms are still holding on to whatever finance is available and are not willing to lend or borrow. Isn’t it much like hoarding or using a euphemism- saving themselves for worst times to come?
The WSJ/Mint article shows financial firms are not disclosing correct LIBOR and this is leading to false market signals. They are disclosing rates lower than the actual as they are afraid higher rates will show that they are distressed. This is leading to overall lower interest rates as most lending/borrowing is done at LIBOR plus rates. So, there is a problem everywhere.
Did people learn anything from previous financial crisis? Nothing at all. It is still the same. Numerous research has been done to show nothing has changed (see this as well) and no lessons have been learnt. So, it can’t be said this crisis is different and hence intervention is needed.
So either we should not support government intervention at all and let markets solve the problem by itself. Or, we should understand the fact that in any crisis the response is much the same- government interventions and market distortions. There are no easy solutions/answers.