The Federal Reserve cut interest rates a half a point today, in an effort to reverse the increasingly dismal economic trends. The cut was yet another unprecedented Fed action, and another attempt by government to correct this economic downturn. This crisis has divided people in a number of ways (academic vs. financial economists, fundamentalists vs. realists), but in this post, I'd like to examine the more traditional debate between government interventionists and free market advocates.

I've wavered a bit on the bailout bill, because I haven't been able to pinpoint exactly what the bill was trying to do. If it is trying to increase confidence in lending markets in order to avoid bank runs and allow companies to receive short term loans, I understand (although I haven't seen evidence that credit markets are responding well). However,  if the argument is that AIG, Goldman Sachs, etc. are "too big to fail," the bill becomes harder to swallow. A market system must be a profit and loss system, otherwise the market will no longer focus on the consumer. Thomas Sowell, a magnificent economist, likes to say that economics is the study of "and then what?" When Americans allow the government to arbitrarily choose what the market should look like, what have we said about our economic philosophy?

What worries me most about the recent onslaught of government intervention is the lack of clarity about the problem we're trying to solve. Is this just another bubble that should be allowed to run its course, and did government intervention create the bubble in the first place? Does the Fed even know if these toxic assets will appreciate, or could this $700 billion bailout actually cost taxpayers even more? Is deregulation really to blame? Are we finding more flaws with free market principles, or is this crisis a market correction  of a policy-aided bubble and an overextended financial sector?

Undoubtedly, the past weeks have created a panic among most Americans. Government officials have added to the panic (namely, Barney Frank's assertion that "we don't have a choice now of debating whether (the bailout bill) is a good or a bad thing or Bernanke's and Paulson's predictions of imminent economic collapse). 

Amidst a panic, people see (wrongly, I think) government as a benevolent, omniscient entity. 

1 comment:

Vince Siu said...

I agree; in times of panic, people do turn to the government as the source of stability and benevolence, so the government's rash, knee-jerk reactions really don't help. People want to see the government doing things in the best interests of the people; while I'd be horrified to learn of an opposite situation, "most of the energy of political work is devoted to correcting the effects of mismanagement of government."

I'd love to be proven wrong on all my views on the bailout bill, but so far it hasn't happened yet. My hunch says that the situation will keep plummeting for a while. Let's hope that doesn't happen.