From the initial “subprime crisis” on, challenges to financial institutions and their viability have been called a credit crisis.

Now that governments have stepped in to support financial institutions and their management – the archetipal fat cats – many look for a drastic review of the “market-state balance” and reining in the market. A simple enough reasoning: the market is needing us (our taxes monies) to help, so we are better and stronger than it is. Besides, we pay the pipers now, so let’s choose the tunes.

This assumes a crisis of the market as a mechanism to make financial business decisions – even business decisions altogether.
One simple question drives a completely different conclusion, with a very sobering answer.

What has happened in “the market”, starting from the financial market?

From what I see, everything is still there except for the assumption we know how risky credit is. For decades, banks and exchanges, working as a market, have been pricing lower and lower the risk of credit. Now their assumed effectiveness has been proven majestically wrong – at one topical time. As a result, the same banks and exchanges, now seen as businesses, and all other businesses, see their credit worthiness in question.

In this perspective, governments have stepped in as assumed credit worthy payers, or lenders of later resort. Being an assumed better payer is very different from being better at assessing risks, or making decisions. It is even farther away from being a stronger financial institution.

In fact, we all can remember when markets have been quicker, wiser, and mightier than governments at bets. One wrong bet does very little to change this, however majestically wrong. Markets will certainly be again better decision makers sometime in the future. Or, if one prefers, governments will certainly be worse decision makers.

Even more importantly, governments have proven poor payers, if seldom. Governments have failed as debtors, including those of “big” or “serious” countries.
This is the real risk to bear in mind and focus our citizens’ minds on as we watch our watchwomen and watchmen.

The conclusions appear to be: let’s

  • keep apart markets as businesses (the financial services institutions) from markets as decision makers. When we own a financial institution, we own that business, while the decision making market still remains free and unreined
  • keep using the tried and tested mechanism of independent authorities (national banks, commissions) to monitor the decision mechanisms (markets, especially financial) and tune rules as economy goes on
  • keep using the tried and tested mechanism of markets (decision makers) to assess risks and make decisions, even financial decisions
  • if anything, improve the meta-decision making mechanism of independent authorities so they can help markets adapt. Let them alone now at their job of fixing rules for financial markets, and keep watching governments that watch the.

Most importantly, let’s brace for when the political decision making systems of governments will be under as much stress as the financial strength of governments and the economical decision making systems of markets; that’s when democracy is at a test.

History shows we have failed that, too, and can easily do the same again.