This friday in one of my university classes we are going to be discussing this article: http://www.lrb.co.uk/v30/n20/lanc01_.html
It is titled "Cityphobia" by John Lanchester.
As I read it I can't help but think how opposite this is to everything I've been learning through Austrian Economics. I'm hoping to get some advice on which particular points do you think I should attack in this article? Any suggestions on approaches to take in highlighting errors in his thinking? I am wanting to represent free market capitalism as best I can for I know that the majority of the students are coming into this article with a heavy socialist, anti-capitalistic, pro government intervention mentality. Thanks in advance if anyone wishes to help.
Mention that none of that would be possible without the central banks of various countries (including the US) artificially lowering interest rates, and in the US having penalties for not giving as many loans as the federal government felt should be given.
Here is just a start:
"Financial institutions in the US lent money to people with poor credit histories. This wasn’t a bad thing in itself, indeed it could be seen as an example of capitalism at its most beneficently creative – indigent housebuyers needing loans, financial institutions wanting high-interest-paying borrowers, and presto! a new class of homeowners coming into being. "
This was due to the government forcing the "Community Reinvestment Act" upon lenders. In addition to artifically low intrest rates induced by the FED.
"The invention which made it possible for the lending to become so reckless was securitisation: the process by which loans were added together and sold on to other institutions as packages of debt. This had the effect of making the initial lender indifferent to whether or not the loan could be repaid – he’d already sold the debt to someone else, so he didn’t need to care. These packages of debt were then sold on and resold in the form of horrendously complex and sophisticated financial instruments, and it is these which are the basis of the global jamming-up of capital markets. "
What do you do when you are FORCED to take on more risk than you should? The banks figured out a way to pass that risk on to someone else through derivatives.
Probably the best response is to point out that the regulators, particularly central bankers, did nothing to stop this even though they had the full power to do so.
What makes them think that giving regulators more power is going to change their mind next time?
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