In Defense of Government Action

Vincent, I think that throughout this crisis a fundamental reality has been consistently overlooked by those against the bailout. One reason that people seem to object to the proposal is on the grounds that it will spell greater government regulation of the financial markets. The fact of the matter is that the financial market is one of the most highly regulated sectors of the economy. The SEC conducts exhaustive reviews of every major investment bank and commercial bank, in addition to brokerage houses and asset management firms on a regular basis.
Other actions taken by government agencies with respect to the financial markets should perhaps be viewed as measures to vivify the economy rather than strict regulation. For example, the increase in the FDIC's deposit guarantee should ensure that bank deposits, especially those of high net worth Americans, remain in American banks. This will function to increase liquidity and should ease some of the pressure on the banking system.
As Europe continues to experience woes related to a discrepancy between the level of interconnectedness of the domestic economies and domestic governments (hitherto, the governments of Germany, Denmark, Sweden and Austria have all taken steps to fully guarantee bank deposits in their countries), we could see increasing pressure on European governments to form emergency funds to absorb distressed assets, a lá US Treasury.

1 comment:

Vince Siu said...

In response, I see where the government is coming from with the bailout bill; I just don't agree with the principles behind it. Purely from a theoretical perspective, I think the bailout could potentially affect the economy in the way Ron Paul laid out in the video I linked to in my post. Of course, I'd love to be proved wrong.

You raise a good point, too -- the financial market is one of the most highly regulated sectors of the economy. A lot of people tend to forget or fail to notice that.