Just when you thought the presidential campaign and its upcoming debates were the biggest show in town, the meltdown of some of the largest U.S. investment banks has stolen the spotlight…big time.Economists are still evaluating how we got into this current mess.The bursting of the real estate bubble combined with over investment in risky mortgages mixed with a shortage of capital added to an enormous loss of confidence in what we thought were our steadiest financial institutions.
While most economists agree that government must play a role in helping to alleviate this banking mess, take caution! History has shown that making the wrong move can exaggerate an already bad economic problem.In the early 1930s after the historic crash on Wall Street, the Federal Reserve Board actually increased interest rates to get cash out of the system.
In retrospect, economists note that it was the worst decision at the worst time and probably exaggerated our dire economic situation at the beginning stages of the Great Depression.In this current scenario, the Feds have already orchestrated the mergers of huge institutions like Bank of America and Merril Lynch. It has effectively taken over mega mortgage guarantors Freddie Mac and Fannie Mae and infused capital into the struggling AIG, one of the world’s largest insurers.
Now comes a plan from President Bush that would give the Treasury Department the power (and $700 billion) to buy bad-mortgage assets to essentially begin bailing financial institutions out of the mess they created.Ardent free-marketers gasp at the scope of this government intervention and the reality that such a bailout could inflate our national debt to $11.3 trillion. Liberal critics contend that these large government bailouts (like the 1980s bailouts of hundreds of mismanaged Savings and Loan at the cost of up to $500 billion) are just corporate welfare that do little to address the needs of common investors.Congress is filled with representatives of both these perspectives plus a whole lot of opinions in between. Capitol Hill will certainly be buzzing this week as the Democratic majorities of both chambers decide just how to deal with the bold plan put forth by a Republican President with abysmal approval ratings.
Whatever their answer, rest assured that history and the markets will judge just how well—or how poorly-- government was able to intervene in this massive financial mess.
The 2 Regular Guys at CBS 2 School have their take on Government and Free Markets.
VIDEO: Government And Free Markets
Newsweek's Fareed Zakaria reports on how government needs to be interventionist in markets that cannot be totally (or almost) free of regulation. "If you want to be truly free of regulation, try Haiti or Somalia. The real trick is to craft good regulations that allow markets to work well. No regulatory structure will be perfect, none will eliminate risk, nor should they. At best they can tame the wildest gyrations of the market economy while maintaining its efficiency," Zakaria writes.
We put government regulation is business on the political spectrum, (liberal v. conservative), but liberal publication like The Nation and conservative magazines like US News & World Report are expressing concern. This is all the more reason that can be made for "The Real American Poltical Spectrum," where the question of this government intervention will be more on the Economic Eltist or Populist position.
So far the populists in polls don't like it, but will they need it if it has a medicine that helps heal all?
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