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Sunday, January 18, 2009

Role of private capital

Private capital thrives well in a booming economy. They make easy money. They even contribute towards creating bubbles in asset prices. As the prices keep going up, they make more money.
When the bubble burst, private capital is unwilling to take risk. This caused the collapse of the credit market.
Read this article.
The Governments have to step in to provide funds to re-capitalise the banks, to guarantee bank deposits, to guarantee the credits of borrowers (i.e. homeowners, small businesses). In this case, what is the purpose of private capital?
This has happened in USA, UK, Singapore and many other countries. 
What is the solution in the future? I believe that the capital has to be provided by the state (it is already happened) or by state-sponsored mutual funds. Ir should not be provided by private capital that are driven by short term gains.

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