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The Importance Of Free Financial Markets For Free Competition

4.1 Introduction

The financial crisis that has almost engulfed pretty much the entire world and that originated from the U.S. housing bubble and to a lesser extent similar bubbles in many other countries has created a backlash against deregulation and globalization of financial markets, which are wrongly blamed for the crisis. I will not discuss in the real causes of the crisis, suffice to say that the main cause was various forms of government interventions, most importantly the Federal Reserve’s low interest rate policy in 2001-05 and the moral hazard created by the various bailouts it has engineered. For more on this subject, see this article by this author24 and the European Enterprise Institute paper by Johnny Munkhammar and Nima Sanandaji25.

As it was not the cause of the financial crisis, restricting the financial markets will do nothing to prevent future problems of this kind. It will however partially or completely destroy some of the benefits of these markets.

4.2 The Importance of Free Currency Markets

As was indicated in the section on the euro, the optimal solution would be to have a monetary union, which would mean that currency trading would be abolished. Yet while monetary unification is possible and desirable within Europe, and would in a better world be desirable on a global scale too, it is for political reasons not possible and hardly desirable on a global scale in the foreseeable future. And in any case, free currency markets are certainly the second best solution.

While the division of the world into different currency areas does create economic efficiency losses, they are small compared to how bad it would have been in the absence of currency trading, as that would force all countries to cease international trade and financial transactions, or limit

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http://mises.org/story/3244 http://www.munkhammar.org/blog/pdf/TheFinancialCrisisEEIfolder.pdf

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