Wednesday 8 October 2008

The Boom-Bust Cycle of an Ideology

Gideon Rachman writes in his latest column for FT.com that ideas, similar to the stock market become fashionable and get pushed to their logical conclusion and beyond, leading to “irrational exuberance” and then a crash. The 2008 Credit Crisis is a direct consequence of a 30-year bull run in an ideology that began with the Thatcher-Reagan regimes of the 1980s.
Three central ideas can be identified out of the Reagan-Thatcher era: the promotion of home ownership, financial deregulation and faith in the market mechanism. These ideas worked fantastically for three decades, leading to increased prosperity and freedom. Yet, when the ideas combined were pushed too far it created an enormous disaster.

For example, the subprime mortgages - at the heart of the current financial crisis - personified the dream of home ownership for everyone, even if they could not afford it. In April 2005 Mr Greenspan praised subprime mortgages for helping to widen home ownership. Investment bankers, were allowed to bet their banks on these market segments because regulators and politicians believed firmly in the self-regulating qualities of the market.

Today the intellectual cycle has swung decisively against the right-wing ideas of the Reagan-Thatcher era. Rachman believes regulation and government intervention is bound to overshoot in the other direction. But eventually the joys of government regulation will fade and nostalgia will set in once again for the go-go years on Wall Street and the bracing qualities of neoconservatism.

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