Column : The Marx-Hayek solution

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: Some people are getting rather happy about the crisis. They see it as the final collapse of capitalism, the exposure of the dangers of liberalisation, the vacuity of the American way and the folly of the free market. Many crow that America is now a socialist country having ‘nationalised ‘its banks. The Left has warned finance minister P Chidambaram to stay away from further reforms.

What has actually emerged from the turmoil of last two weeks is a very different picture. There is a credit crunch and indeed investment banking as a form of financial enterprise has died a sudden death. But if a sector has overexpanded, it should shrink or if a certain form of enterprise no longer meets the market criterion it is quite right that it should vanish. There is no need to prolong its existence by subsidy or regulation etc. The way in which Lehman Brothers was allowed to go bankrupt and Washington Mutual and Wachowa were taken over by other banks was just what a market does when it is doing its job. The AIG takeover was hard on its shareholders and protected the customers.

The Congress has shown real guts in not rolling over before the Paulson-Bernanke onslaught. It refused to sign away $700 billion on the dotted line. Wall Street was reminded of the free market philosophy by some legislators who take such things seriously. They were schooled in Hayek and as libertarians, they believe that in a free market there should be no handouts and no free lunches. Thus, the package which emerges has to be much leaner and much tougher than what Paulson wished for. Depositors will be given a larger guaranteed sum which will be insured and once that is done, banks can go bankrupt as they wish. No need to waste tax payers’ money as we do in India with petrol subsidy and power subsidy and debt cancellation, etc. Most such ‘socialist’ schemes are just regressive redistribution for which securely employed and overpaid public sector employees and their political agents agitate.