A Comparison with Foreclosure Crisis Today With Crisis in Turkey Yesterday

December 5th, 2008 | Tags: Foreclosure Crisis

A parallel can be drawn and a comparison made with the foreclosure crisis of today and the financial crisis in Turkey yesterday. Bulent Gultekin is a professor of finance and an expert in global financial markets and capital controls. At the time of the crisis in Turkey he was the governor of the Central Bank there. Gultekin sympathized with what the Federal Reserve Chairperson Ben Bernanke was experiencing as a fall out of the foreclosure related financial crisis. Gultekin aptly said, “You live a month and it’s probably like ten years in a condensed time”.

According to Gultekin the era of oil shocks started in the 70’s. Since then all the importance economic crises have centred round the financial industry. All of them were the result defective public policy and then these were cleared up mainly through taxpayer’s money. He said, “There’s always an accommodating public and economic policy that tries to sustain an unsustainable situation. There’s a high correlation between inadequate or misdirected regulation and financial crises. It’s a myth that financial markets regulate themselves. They don’t. Markets, just like individuals, do respond to incentives, and if there are distorted incentives, they react in a distorted fashion. And that also results in very poor resource allocation. In hindsight, we look back and wonder how we could have dedicated so many resources to the financial sector.”

In 1994 there was drop of 6% in GDP in Turkey. Gultekin opined that in Turkey as well as USA it is the taxpayer that has to pay for the follies of others. The banking system is like the bloodline running through the economy. If that system is not cleansed nothing will happen. Hence there seems to be no other alternative to fix the foreclosure crisis but to bailout the banks. In Turkey the media were owners of the banks and they agitated for a rescue and clamoured for IMF intervention.

Referring to the foreclosure triggered financial crisis Gultekin said the central bank chief should be given due respect but figures like him should also “ take the punchbowl away at the end of the party.” He felt that America was taken by surprise and could not address the distortions that that had helped this foreclosure crisis. He explained, “You just cannot have 20% of corporate profits (coming) from the financial sector.” Understandably he was sharply critical about the bailout package and bemoaned that there are not better finance economists to frame something sensible.