the human error in market fundamentalism

When the market fails, the state has a role to play

Strict adherents of free-market ideology hear in that the cry of failed business over the ages; special pleading by industries that prefer state subsidy to competition. If people aren't buying Jaguars, goes the riposte, it doesn't make sense to carry on making them with taxpayers' money. The market can be cruel, but it knows better than politicians how resources should be allocated.

That logic seemed compelling when the market was functioning. But when the market fails, so does the argument against intervention. Recent events have proved how the most market-focused minds in the world can make terrible decisions. Their ability to misspend easily rivals the public sector.

It was not civil servants who created securities based on home loans to people with no incomes. It was not public sector workers who gave triple-A risk ratings to those investments. It was not governments who bought into the fund run by US financier Bernard Madoff that was last week revealed to be a giant $50bn Ponzi scheme. Banks around the world, including HSBC and Royal Bank of Scotland, lent billions to funds that invested in Mr Madoff's scam. None of them carried out the due diligence that might have indicated the money was disappearing into a black hole.

Bankers have blamed lax regulation in the Madoff case and for the wider problems of the credit crunch. It is true that regulators failed to spot the excessive risks jeopardising the stability of the financial system. But it is a strange intellectual contortion for those who decried state interference during the boom then to lament that the bust was caused by insufficient supervision of their affairs.