Market failure, 2008

Few participants in equity markets or other credit markets, including the shadow banking system, foresaw the GFC meltdown. They all collapsed suddenly after Lehmans hit the wall.
As the proximate cause of Lehman’s collapse was the property bubble, which was happening right under the noses of every American mom and pop, one might have expected a more orderly and staged retreat of participants from the relevant markets as the prudent and the cautious cashed out, followed by the more adventuresome and less attentive.

Yet this didn’t happen. Instead the world watched an amusing and chaotic post-collapse rush for the exits.
It’s all very well for markets to blame some dodgy shuttle component manufacturer after the event. That isn’t the primary function of markets. We have courts of law to punish incompetents and shysters.

The market is supposed to discount efficiently for risk. Quite evidently, in the most significant test since the Great Depression, credit markets failed.
I won’t even mention the fact that world markets would have become extinct but for enormous bail-outs funded by taxpayers.


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