ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Learning from the Crisis

The article ‘Wall Street: Hoist With Its Own Petard’ (September 27) by D N Ghosh argues that it is lack of regulation that mainly led to the crisis. I do agree with his analysis; however, I also believe that there is a lot to be learned from the crisis, especially for India, and not merely “watch the reality show as it unfolds”. The notion that a “free” flow of capital will allocate resources to the best ends does not seem to hold in reality. For instance, in the US mortgage market, there existed fi nancial capital and different institutions (insurers, investment banks, investors, etc); though regulation was absent, the whole process did not result in a desirable outcome. Any mechanism which involves the exchange of a lot of financial capital is bound to have repercussions on the entire economy by affecting the volume of output through changes in price levels, savings and investment rates, and so on.

Mainstream economic theory has gone terribly wrong – interrelationships and interdependencies have not been understood correctly. Economists and policymakers seem to have forgotten John Maynard Keynes. Though he was well versed in probability techniques, he did not quantify expectations in his 1936 classic The General Theory of Output, Employment and Interest. He was aware of the dangers that such quantifying could result in. The present crisis largely owes to the failure of risk analysts and their software which quantified risk.

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