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Benchmark News

With the current turmoil in the capital markets it is amazing how many captains of industry internationally are calling for governments’ intervention to minimize the capital losses that have been incurred by investors. Why is it the capitalists when they are making money, they consider the Government and the public sector to be irrelevant. As soon as they start losing money, they run to the Government with request for support?

Further, it is even more concerning that Central Banks such as the US Federal Reserve keeps dropping rates to effectively “prop-up” the equity markets despite knowing that the market created the mess themselves through a hybrid of instruments and financing vehicles that were not sustainable right from the beginning, for example aggressive margin lending, sub-prime mortgages and lenient lending guidelines. It will be interesting to see how the Reserve Bank of Australia reacts under the weight of local inflation pressure vis-à-vis the World’s biggest (US) economy’s recession?

In most recent past, turbulence in the capital markets has been experienced in the 1970’s, 1980’s, in the 1990 and now. Does this mean that the capitalist model of “free” market is no longer sustainable or is it more to do with the increasing speed of available information on which investors behave much quicker than in the past, or is it something else completely different, for example the polarity of poverty in some parts of the world compared to material excesses in other parts of the world?

Where is the debate from the academic institutions, the multi-lateral and bi-lateral agencies on the market’s melt-down? Have they decided not to comment on these critical issues for fear of fund cutting from the donor and funding governments?

The developed countries and donor agencies are continually recommending the developed country’s economic and financial models to the developing countries. In view of the significant negative economic impacts on the poorest individuals in the developed countries, are the developing countries doing the right thing?

The answer is in a combination of knowledge, market and government forces. Some of the developing countries are not ready for a “free market” because they do not have institutions in place, they lack the depth of skilled staff and they lack the exposure to information to make some of the decisions. They need time to see and learn, and then assess the impact of the proposed changes. In the developed economies, for example, issuance of financial market instruments that not many investors understand, the global nature of capital movements, the speed of information flows, greed and selective intervention by Governments and Central Banks all impact on the demand and supply of goods and services and the ultimate results. The action by donors, Governments and Central Banks will not change in the short-term. We need to encourage debates at all levels of society to ensure that information is generated to enable improve decisions. Actions taken by developing countries need to take into account the following: -

• Don’t borrow what you cannot repay;
• Understand that investments in financial market will continue to be volatile. Monitor management movement and act accordingly;
• Network with your peers (other countries) and share research;
• Encourage education and question good willed recommendations.

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