the role of the government in times of crisis

The Role of the Government in Times of Crisis

October 17th, 2008 By: Michael van der Galien
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Many people believed that the U.S. government, and European governments, should help out financial institutions in trouble. The major reason, as expressed by those who held it, for this belief was that it was generally assumed that if the crisis in the financial markets would increase, these companies would take the entire economy with them.

People such as myself, who are critical whenever the government says it should act in the economy and spend more, could nevertheless support the bailout bill (and other similar bills in Europe). Not because they believed that the government could (or even should) prevent the economy from falling into a recession, but to make sure that the recession would not come suddenly, in a split second, and thereby creating tremendous panic, which would make the situation even worse.

In other words, the main reason many normally fiscal conservatives supported the bailout plan was that it would, we thought, prevent a severe crisis, similar to the Great Depression in the 1930s. However, the idea was never that the government should do whatever it would take to prevent the economy from having a tough time in the months and year ahead. Unemployment would almost certainly go up, and people would suffer financially. Preventing that was not the intention; it was controling the damage.

And that’s exactly why most of us cannot support what Paul Krugman proposes in his latest column for the New York Times. In this column, published today, Krugman makes the case for more government spending in a wide array of areas, such as unemployment benefits. Krugman’s reasoning is the opposite of the above: he does not merely want to control the damage, he wants to prevent possible damage.

What he overlooks in his column, however, is that recessions and moderate crisis are the economy’s way of correcting itself. Every now and then the market has to get rid of weak elements, and keep the strong ones. This economic crisis is no different: instead, the best Krugman can hope to accomplish is yet another artificial boom, which will then strike hard a few years later… unless the government will then be willing to invest even more billions, no, trillions, to prevent it. This will drive up the deficit even more, and create a situation in which even the government will not be able to control the damage years, perhaps a few decades from now; the children of those voting for grand plans now, will then be forced to suffer for the irresponsible spending of their parents (and grandparents) and their unwillingness to deal with any sort of crisis.

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  1. c3

    October 17th, 2008 at 22:56

    Reply |
    Quote |

    Think of it like New Orleans after Katrina.  Beyond getting relief to the city and rebuilding infrastructure, some wanting to prevent folks from moving back into exceedingly flood prone areas (i.e. the 9th ward).  OTOH some wanted to rebuild the 9th ward better than it ever was, raise the height of the levees etc.  In crisis are many hidden “opportunities”.  I would suspect we will seen new regulation that will attempt to blunt/prevent future “bubbles”  Who would criticize right?  Except until the bubble bursts it can be a time of great prosperity.

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