Is this the end of US style free market capitalism?

Is there a requirement for more regulations?

Is it fine to privatize profits and nationalize losses?

Is this bail-out going to lead to major 'moral hazards'?

Was this a result of failure of leadership of these firms?

Let's try and understand these doubts in a broader perspective.

These bail-outs would certainly be a bitter pill to swallow for all those who argued that free market capitalism was the best, and there should be no regulations at all in an unfettered market. And this idea has been most certainly put to rest in the last few days with the US government curbing short-selling and offering guarantees to money market mutual funds on 19th of last month, as it attempted to bail-out hundreds of billions of dollars mortgage debts. This follows the bail-out of three financial giants early last month. The stocks soared in response to these actions. Though this certainly re-affirms the requirement for regulations, but the question arises as to what extent this marks a shift towards more interventions.

It is a fact supported by many leading economists that history suggests that policy makers demand de-regulation during good times and bailing out in a big way at the times of crisis.

The present action does address the short-term problems of liquidity crisis and mid-term problem of dealing with bad assets, but on the longer term regulatory issue, there is no strategic plan in place and that is really problematic. What is required is a complete overhaul of present regulations and not just more regulations. Moreover, the government rushed to rescue these firms without trying many of the private sector solutions.

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* Contributed by: -
Madhav Sharma had been a Marine Engineer by profession while Sumit Singh had been a Software Engineer before they joined Ist Year Full-Time MBA at NMIMS, Mumbai.
Article posted on October 11, 2008.