The current crisis is the culmination of a 30-year domination of economic policy by a free-market ideology that has been variously called neo-liberalism, economic liberalism, economic fundamentalism, Thatcherism or the Washington Consensus. The central thrust of this ideology has been that government activity should be constrained, and ultimately replaced, by market forces.Having thus identified the problem he then moved onto the source
Neo-liberal economic philosophy has its roots in the theories of Hayek and von Mises, who believed that society should be characterised by the "spontaneous order" which emerges when individuals pursue their own ends within a framework set by law and tradition. Ideally, the role of governments is simply to enforce contracts and protect the allocation of property rights. All other economic functions should be left to what Reagan called "the magic of the market".The essay has been given considerable attention and now that it has been translated into Chinese has attracted further scrutiny. Writing in the Chinese newspaper The Economic Observer Professor Xu Xaonian from the China Europe International Business School in Shanghai called the essay "shallow and crude" and Rudd as being either "short of economic knowledge or is misleading his readers"
Dr Xu says "Lu Kewen" - Mr Rudd's Chinese name - made a "big, big mistake" in forming his "confident opinions" based on "the observation that the crisis came as a result of neoliberalism and the absence of supervision".Indeed, a failure of government is exactly how Ben Bernanke would describe it
..Lu smartly transformed a failure of government into a failure of the market - a form of propaganda by him and his social democrat comrades which now looks as if it is working."
..the origins of most financial crises (excluding, perhaps, those attributable to natural disasters, war, and other nonfinancial events) can be traced to failures of due diligence or "market discipline" by an important group of market participants.An allowance of $1B was made to rescue both Fannie Mae and Freddie Mac from imminent collapse.
Both of these conditions apply to the current situation of Fannie Mae and Freddie Mac
...Fannie Mae and Freddie Mac were created by acts of the Congress and are thus known as government-sponsored enterprises, or GSEs.
...GSEs face little or no market discipline from their senior debt holders because of the belief among market participants that the U.S. government will back these institutions under almost any circumstances.
In his Nobel Prize speech Friedrich von Hayek touched on the role of government and the role of markets. He sees government policy failure as a "failure of the economists to guide policy more successfully " due to their poor deductive processes
In economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones...Hayek warns against the "pretence of exact knowledge" by saying;
... in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable.
The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men's fatal striving to control society - a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.
