Market Fundamentalism - Fundamentalism and The Financial Markets

Fundamentalism and The Financial Markets

In late 20th century United States, every time that credit expansion coincided with economic difficulties, the government intervened, injecting liquidity and stimulating the economy. This system of 'asymmetric incentives' (also known as "moral hazard"), encouraged ever greater credit expansion, as its risks to financial institutions were mitigated by the state intervention. Financial regulations were progressively decreased in the United States from 1980 (when Ronald Reagan became President) until the financial crisis of 2007–2008.

eople came to believe in what former US president Ronald Reagan called the magic of the marketplace and I call market fundamentalism. Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves. Nevertheless, market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalised and the US started to run a current account deficit. —George Soros

The worldwide financial crisis of 2007-2010 is described by Joseph E. Stiglitz as the end of market fundamentalism:

In this sense, the fall of Wall Street is for market fundamentalism what the fall of the Berlin Wall was for communism—it tells the world that this way of economic organization turns out not to be sustainable. In the end, everyone says, that model doesn't work. Actually the model only failed the citizens, while working perfectly in ensuring profits for the Wall Street financial groups that run the USA, so privatising gain and socialising the risk when the markets fail to work as hoped. This moment is a marker that the claims of financial market liberalization were bogus. —Joseph E. Stiglitz: "The Fall of Wall Street Is to Market Fundamentalism What the Fall of the Berlin Wall Was to Communism", Interview with Nathan Gardels, The Huffington Post, September 16th 2008

Critics of Joseph E. Stiglitz's comments point out that Wall Street firms associated with the financial crisis are highly regulated entities and do not operate in a free market.