Trust Crisis: what melamine and the banking crisis have in common by mattsteinglass
October 4, 2008, 11:07 pm
Filed under: Economics

Here is one syllogism I never quite got, in the libertarian, laissez-faire, Friedmanite view of the world:

Greed  ——->>>  Trust

Banks won’t lend each other money because they don’t trust counterparties not to be holding huge amounts of opaque, worthless mortgage-backed securities. No one in East Asia will buy milk anymore, and no one will buy any processed foods from China, because they don’t trust that there aren’t toxic industrial chemicals mixed into the dairy products. And market mechanisms are supposed to solve this how? In every country in the world, the profession “Inspector” comes with a government badge. There’s a reason for that.


3 Comments so far
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Are “security inspections/ratings” a public good? It’s non-rivaled, but excludable… so shouldn’t there be a market solution? Like setting up some sort of rating agency? On the other hand, this agency would need to create trust in itself in the first place – but that’s the point with government inspectors as well. I guess, in a country with no accountable government (let’s say: North Korea or Burma), would you actually trust the government to be concerned enough about the public to actually provide correct information?

Comment by Finja

In North Korea and Burma, no. That’s why no one will buy processed milk products from (or in) either of those countries.

Let’s put it this way: milk in East Asia IS certified by private companies. The Western multinationals producing dairy products in China all had their own inspection and certification systems. It failed. Private inspection and certification has an important role to play in certifying HIGHER standards on things like fair-trade coffee. But for basic health certification, it’s got to be a government job.

Comment by mattsteinglass

As for banks not lending to each other, you wouldn’t happen to be talking about Iceland or Utopia, oops, I mean the EU would you? Every country has its problems, be they China, the EU (whether you admit it or not), or the USA. And by the way, if Asia in general, and China in particular were so terrible, Western liberals such as yourself would not be pouring into that region by the millions every year, even though that region is probably more libertarian than any other region in the world today.

Comment by Frank

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