rotux
/ 2008-03-11 15:16
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Uznany Gracz Giełdowy
-Okay, so the fed is bailing out the banks. Please take it one step further. What is wrong with that?
-You ask a crucial question... However you characterize what's going on is it a good idea? Can the strategy avert a recession / save the economy / end the crisis, whatever? That really depends on where you think the crisis comes from, and whether you think the forces that have prevented crises from emerging earlier are still in play. If you think, in Felix Salmon's words, that credit markets are just "hysterical", then there's no problem with temporarily assuming aggregate credit risk until they come to their senses. Even if you think there is an "insolvency crisis", you can argue that letting the Fed absorb the pain is a good idea, since the Fed can always paper over its own insolvency. But if you think there are deeper problems with the US economy, that the financial market crises are a symptom of misallocations and deficiencies in the real economy, then the Fed's actions are not only unlikely to help, but may do positive harm. If resources are misallocated and the US is underproducing and badly investing relative to the consumption it wishes to maintain going forward, bailing out failing banks maintains a prominent role for organizations with a demonstrated incapacity to allocate well, rewards people handsomely for having squandered valuable resources, and creates incentivizes ambitious financiers to devote themselves to holding the macroeconomy hostage rather than figuring out how to allocate resources well.
/Steve Randy Waldman-interfluidity.com/