The Market Paradigm

The credit crisis is still with us, and may be for quite some time yet as the shock to the system was deep and profound, going well past the point where it could bounce back rapidly as if from a temporary downturn of the kind that all economies expect to happen periodically. In this instance long-established practices and assumptions have been thrown into disarray, especially since these were based on a belief in the self-correcting power of the market. Markets, it was believed almost universally within the financial community, would always tend towards equilibrium if allowed to go about their business without outside interference (hence the concerted opposition to any significant government role in their running): investors were rational beings and therefore would always act in such a way as to protect their self-interest. Plainly, that did not occur in this case, any more than it did in the Wall Street Crash of 1929, the only other truly comparable financial crisis of modern times in terms of global damage. Investors can in fact be extremely irrational, and bubbles can, and do, arise, often with catastrophic consequences for the national economies involved.1 We have the dubious distinction of having added one of themost damaging bubbles ever to the historical canon, one that future generations will no doubt study with considerable fascination, wondering why we did not heed the plentiful warnings of trouble ahead and take suitably evasive action while we still stood the chance.