Finance and free-markets

The story captioned ‘Barclays Fine Spurs U.K. Scrutiny of Derivatives Conflict’ in Bloomberg attracted my atention. There is no conflict here. It was plain fraud. Faced with a situation of having to make payment on a Gold barrier option (knock-out option?), the Barclays trader played around with the fixing of Gold price the next day. The ‘fixing’ is an anachronism in an age when many seemingly intellectual types working for investment banks argue their case with practised consummate ease and sophistication (or, sophistry) for a market economy. Then, the second is a case of not honouring a contract through manipulation. This is the problem that many who argue passionately argue for a market economy fail to recognise.

One, when ethics and honesty are abandoned, market economy fails. Second, market economy means that there are producers/suppliers of services and consumers. Usually, the latter are dispersed and are not organised. They lack the concentrated clout of the former. The deck is loaded against them, to begin with. In theory, barriers to entry and exit can be eased to allow competition to play its part in keeping players well behaved. But, absent sufficiently large numbers of players, cartels can be easily formed. We have seen that in several industries – steel, aviation, mining, shipping, etc. The upshot: whether you are a developed nation or a developing nation, the State cannot simply leave things to the market.

Two related links are here and here.

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