FARMERS AND TRADERS<br /><ul><li>PAST TWO YEARS OBSCURED </li></ul> THE CHARM.<br /><ul><li> SPECIFIC FAILURE OF FINANCE AND</li></ul> NOT GENERIC FAILURE OF MARKETS.<br /><ul><li>RETREAT OF ANGLO SAXON LIBERALISM.</li></li></ul><li>ANGLO SAXON LIBERALISM – the most talked about today<br /><ul><li> It is a capitalist macro</li></ul> economic model in which <br /> levels of regulations & taxes<br /> are low.<br /><ul><li> Liberal reforms designed to</li></ul> increase the supply side<br /> capacity of an economy.<br /><ul><li> It loses some of their urgency when the</li></ul> economy is too weak to achieve the potential<br /> it already has.<br />
Arms length or hands on?<br /><ul><li>In the Anglo Saxon model deep capital markets compete with banks and which also compete vigorously with each other.
Transactions are carried out at arm’s length, on the basis of public information at competitive prices and under contracts enforceable by third parties.</li></li></ul><li>ADVANCE DRAMATICALLY REVERSED<br />
<ul><li>The traditional alternative to arm’s length finance is a more intimate system dominated by banks that maintain long term relationships with their borrowers.
This clubbier finance offers three important advantages over the stand-offish Anglo-Saxon model.
They can smooth their lending to them during periods of misfortune.
They have skin in the game.</li></li></ul><li>DRAWBACKS OF HANDS ON<br /><ul><li>In such a system a small cluster of Banks comes to a committee decision on whether a venture is worth backing or not.
The process requires bankers to submerge their disagreements and accept a compromise.
Markets on the other hand allows investors to agree to disagree. Thousands can place their bets, based on their own hunches and insights. When it comes to financing of new technologies, it is often better to leave the job to the wisdom of the crowd, than to the conventional wisdom of loan officers in a bank. </li></li></ul><li>Analysis of the markets<br /><ul><li>Mr. Lall of IMF have shown in his study of industries that contributed the most to world growth from 1980-2001
Countries that had wrong industrial mix did less well but was less of a problem for countries with arm’s length financing system.
He says ‘these systems do a better job of reallocating resources from declining to growing sectors.</li></li></ul><li>NEO CLASSICAL MODEL<br />
The worst of both worlds<br /><ul><li>The markets most damaged by the crisis are those for securitized assets. Banks kept a surprising share of subprime securities on their balance sheet, rather than selling them on.
These banks suffered 30% of the subprime losses in 2008.
This crossbred model provided neither advantages of arm’s length securitization nor any advantage of intimate finance. The banks had no relationship with the mortgaged holders or companies from whose borrowings their mince most securities were reconstituted.</li></li></ul><li>LOW OCTANE FUEL<br /><ul><li>The banks freedom to borrow will be regulated more tightly in the new normal.
They will be required to hold more capital once recovery is assured.
Regulators in Europe and America may also oblige the creators of these securities to hold on to 5% of the value of the assets they distribute.
In light of the current constraints on lending capacity, restarting securitization could help get credit growth moving again.</li></li></ul><li>What IMF says?<br /><ul><li>IMF: Securitization market’s misery is hurting credit and therefore demand, but it need not do lasting damage, but it need not do lasting damage to the economy’s longer run prospects.
These markets are a dominant provider of mortgaged finance and an important source of car loans and consumer credit.
Replacing obsolete methods of production with better ones.
Supplanting old industries with new ones.</li></li></ul><li>conclusion<br />Messrs Allen and Gale notes, the Anglo Saxon <br />stock markets have been conspicuously successful at <br />sponsoring new industries and reallocating resources to<br />them. For all its excesses and eccentricities, these feats<br />of economic reinvention are the Anglo Saxon model’s<br />saving grace and they remain vital to the process of <br />industrial renewal. <br />