As the headlines in today’s newspapers all around the world show, there is a global economic slowdown. Economies all over the world are being plunged into what is tentatively being called “Recession. ” While there are those who believe that this is simply an expected trend given the rapid growth of the global economy, it still does not detract from the fact that it is an urgent and pressing problem. In order to address this problem, several governments have issued massive bail-outs and laws designed to manage the system.
In line with the principles of Keynesian Economics, it seems that the government is the only player capable of solving this problem. It is this government intervention through the Federal Reserve, led by Ben Bernanke, that is touted as the solution to the country’s, if not the world’s, economic problems. As such, this section will attempt to show the mistakes the government has made through its intervention and the solutions that might be implemented to address the problem.
Russell Roberts, however, in his article entitled, A Marvel of Cooperation: How Order Emerges without a Conscious Planner, argues that there is no such need for massive government intervention because economics has a way or bringing about order in life. Citing the teachings of Hayek and Frederic Bastiat, he effectively argues that the workings of the markets do not need government intervention or guidance for it to flow. He essentially argues that the time for Keynesian Economics has passed. The application of government regulation and intervention techniques are no longer as effective as they used to be.
The previous arguments on the matter have taken the side of government intervention in order to mitigate the perceived “harmful” effects of a regulated market. Classic economists have always held that the ideal and optimal economic performance is determined by the degree of involvement of market forces. Recent economic models however have shown that when the interests involved are public goods, there is a need for a certain level of government intervention. Mainstream neo-classical economic theories, however, discourage too much state intervention.
It is the belief of these economists that too much state intervention unduly restricts the possibility of conducting free trade. It is the theory that the perfect economic model can only be achieved in a laissez faire model. Later economic theories however take a different stand from the neo-classicists in that they postulate that there is a need for government intervention up to a certain extent. Perhaps the wisdom of the words of Russell Roberts is more evident in the manner by which governments all over the world have reacted to the recent economic crisis.
The current economic crisis that has rocked the global economy has prompted many countries to take drastic measures in order to deal with the situation. The Federal Reserve and the National Treasury have also teamed up to deal with this global economic crisis by instituting several reforms and policy changes. With the goal of providing an immediate and permanent solution to the problem, the Treasury, with the help of the Federal Reserve, has instituted these fiscal policies to alleviate the situation.
According to most economists, the current bailout scenarios that have been presented are nothing more than prime examples of throwing good money after bad. Instead of tackling the problem head on by implementing sound fiscal and monetary policies, the United States government is bent on revitalizing the economy by allowing massive losers such as the AIG group to continue accumulating losses and patronizing its already proven bad habits. The main strategy here, as employed by Chairman Bernanke, is to pump prime the economy through a mixed strategy of monetary and fiscal policies.
It is posited that increasing funding to these “black hole institutions” will be the key to ending this financial crisis. One of these policies is the voluntary capital purchase program. It is aimed at selling preferred shares of stock to the United States Government on favorable terms that afford the maximum amount of protection to the taxpayer. Another policy that has been implemented is the systematic risk exception under the FDIC Act which grants the FDIC the power to guarantee, on a temporary basis, the senior debt of all FDIC insured institutions.
The third policy that has been announced is the increased access to funding for all of the businesses in various sectors of the American economy. The goal of this is to stimulate economic growth on a micro level in order to develop solid economic fundamentals that can help resuscitate the economy. Other steps that the Federal Reserve has taken include the strengthening of capital position and funding ability of American Financial Institutions. These are to be achieved through multilateral agreements such as the reciprocal currency arrangement (Swap Lines) with International Central Banks.
Finally, the heralded US $700 billion bailout plan that was recently enacted into law has also been designed to infuse much needed capital into the market and to protect the exposure of several multinational and local financial institutions. While there are indeed real benefits for pump-priming the economy, the more pragmatic approach is to control spending. One of the options available to control this problem is to adjust interest rates in order to prevent capital flight and also encourage more investors to bring in foreign currency.
By increasing interest rates the demand for local currency is increased. The reason for this is that only the local currency can be used in transacting business in the country. This means that investors have to convert their foreign currencies into local currency in order to be able to do business transaction in the market. If foreign investors come into the country then there will now be a marked increase in the demand for the local currency thus stabilizing the exchange rate once more.
While there is certain economic and political sense in the policies of Bernanke, the herculean task of rehabilitating one of the world’s largest economies cannot be done through the efforts of the Federal Reserve alone. Even employing one or a mix of the strategies would only be preliminary to finding the real solution to the problem. So while current theories show that monetary and fiscal policies may indeed impact inflation and unemployment thus alleviating the economic situation, such is not always the case in certain situations as shown in the example provided.
The basics such as solid economic fundamentals must always be considered when looking at the impact of such changes to see if they can really attain the desired effect. Despite all of these moves by the Federal Reserve and the National Treasury, however, it still remains to be seen whether or not these “quick fixes” can actually provide real and lasting solutions that have been caused by poor economic fundamentals. While it is true that without government intervention the problem could arguably be worse, applying the teachings of Hayek, it is suggested that a compromise would be the optimal situation.
As such, the role of the government, if any, according to Russell Roberts would be in leveling the playing field. Government Regulation and Control makes sure that other economies “play nice. ” The current trade embargoes and quotas that are in place have a detrimental effect on many of the world’s economies. As such, the role of the government is to arrive at a certain acceptable stance that does not stifle global economic growth but instead stimulates it.
A government is essential to the progress of the economy because it is able to control not only local factors but international factors as well. With the globalization of local economies, it becomes imperative for any country looking to advance to not only deal with the local situation but the international situation as well. This is the marvel of economics. It is a system that has created itself and has occurred all on its own. This “system of cooperation” is a marvel that owes its existence to no government.
In connection with the economic woes of the world, the teachings of Russell Roberts is perhaps illuminating as it suggests that since the economic problem was caused by government intervention in the first place, it stands to reason that the solution may not possibly lie in that area. Laissez Faire can, and will, create an avenue of growth that will solve the global slowdown. The free market system will be more reactive to the real world scenario and will bring solutions to the current economic problems.