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Need for Massive Government Intervention Policies?

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At a sporting event, having no officiating at all would result in a very chaotic situation, whereas having  too much officiating would result in a game that might as well not be played.  Extending this analogy to the regulation of the American economy and securities industry, we  will always need a certain amount of “officiating” in order to maintain a level (and efficient) playing field for all players and to keep things from getting chaotic.  But a “massive” amount of officiating on a permanent basis (per Paul Krugman’s latest mantra) can result in the total fettering of the financial systems and the capital markets that they propagate, possibly resulting in societal chaos. The governmental approaches of the late1920s through the entire 1930’s should serve as a good case study (in general) of what works and what does not work in terms of particular actions taken and not taken (Ben Bernanke’s expertise), while keeping in mind that the playing field is now a lot bigger, faster, and more complicated (which again reinforces the need for some officiating, but not “massive” officiating). The premise here is that we want to continue to propitiate the competitive creativiity within the American financial industry, but we also need to define and enforce certain reasonable boundaries at the same time in order to keep the markets as efficient and seemless as possible.  Overall, my basic premise is that “enough” regulation needs to be in place in order to keep the speculation side of the coin from overwhelming (i.e., destroying) the risk management side of the coin, but not to the point where the markets become grossly inefficient due to a paucity of speculation.  So Paul Krugman’s “throwing out the baby with the bath water” mantra is not a good policy mandate in my book.

Quote: “The case for free markets never was that markets are perfect … [but] that government control of markets, especially asset markets, has always been much worse”. 

University of Chicago professor John Cochrane, in response to criticisms from Paul Krugman, New York Times columnist and proponent of massive government intervention policies (click on link to peruse “How did Paul Krugman get it so Wrong?”). 

http://faculty.chicagobooth.edu/john.cochrane/research/Papers/krugman_response.doc

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Written by Larry Fry, CCP, MBA

November 25, 2009 at 1:25 pm

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