Saturday, January 09, 2010

Economists Explain Political Aides Disappointment

Some of our political leaders are advocating for more regulation and are disappointed with the results:( from CNN Money )

"Not only do they come for a bailout, but in this short period of time where they have a level of normalcy because of what the government did to help them, they're now back trying to fight consumer offices and the type of protections that will prevent another type of situation where the economy is taken over the cliff by the actions taken on Wall Street and the financial market," Emanuel said on CNN's "State of the Union."

"The most offensive thing is, we haven't seen the kind of increase in lending that we should," Axelrod said in reference to tight credit for consumers and small businesses that need capital for growth."

However, economists Gary Becker and Steven Davis explain the disappointing results are expected given the current economic climate: (Wall-Street Journal)

"We believe two factors are behind this rather tepid rebound. An obvious one is the severe financial crisis that precipitated this recession, with many major financial institutions receiving large bailouts from the federal government...Faced with a highly uncertain policy environment, the prudent course is to set aside or delay costly commitments that are hard to reverse. The result is reluctance by banks to increase lending"

"These facts suggest that it was a serious economic mistake to press for a hasty, major transformation of the U.S. economy on the heels of the worst financial crisis in decades. A more effective approach would have been to concentrate first on fighting the recession and laying solid foundations for growth. They should have put plans to re-engineer the economy on the backburner, and kept them there until the economy emerged fully from the recession and returned to robust growth. By failing to adopt a measured approach to economic policy, Congress and the president may be slowing the economic recovery, and thereby prolonging the distress from the recession."

It bears repeating that this isn't the first time we've seen such a wide margin between policy and reality. Note Chamberlain made a similar observation concerning the efforts to combat the Great Depression:

"Businessmen came to ask themselves whether Roosevelt really understood a system where the hope of profit sparks expansion and investment. Or did he believe simply in centralizing decision and authority in boards and "planners" along the Patomac?"

The preponderance of evidence suggests a new direction that involves tax cuts and more pro-growth policies.



Uncertainty and the Slow Recovery
Wall Street Journal
Jan 4, 2010

Obama aides: Wall Street shouldn't fight reform
CNN Money
Oct 19, 2009

The Enterprising Americans:
A Business History of
the United States

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