Yaron Answers: What Should The Government Have Done During the 2008 Financial Crisis?
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2 Comments to “Yaron Answers: What Should The Government Have Done During the 2008 Financial Crisis?”
Your steps 1-3 (Let them fail. Streamline the bankruptcies. Wind down Fannie and Freddie.) are all good.
But remember the context. This was the big one, the Big One—and it is not over yet. This was not like all the other “preview” crises/recessions we’ve had since World War II. The corruption of the price system had gone on too long, the debt mountains had grown too high. We reached the point where the major banking systems and sovereign nations have become insolvent. The game is over. Your, may I say, partial steps might have accelerated the crisis, but would scarcely have resolved it. The world would have been met with hundreds of thousands of major bankruptcies that it was unprepared (and is still unprepared) to deal with. This is because aggregate spending would have plunged.
So what would be a better plan? My thoughts:
Since the game is over, the losers—governments and their captive banking systems—must go home. They must give up their claim to “manage” economies. The entitlement state must be ended and ended as quickly as possible. The government must get out of the money-defining, bank-regulating, credit-managing business. They must return their gold hoards to the people (at an appropriate starter rate of exchange, then be hands off) and permit totally free markets in banking. (This progression to gold money ((not a government supervised “standard”)) is an important element. It will minimize, to the extent possible, the further collapse of aggregate spending and the resulting tidal wave of bankruptcies—H/T Prof. Reisman.) Their role in loan markets must henceforth only be enforcing private contracts. The politicians will have to have the guts to impose a tax if they want to give money away to third parties, that is, if they really think that will win them elections—no more central bank “monetizing” of their debt. Governments must simultaneously deregulate massively. All this must happen simultaneously and very quickly.
Gonna Happen? No. But it would be the only way to avoid the slow motion crack-up and fearful paralysis we are now experiencing.
So how would things be different? You said the crisis would have happened sooner, banks would have been more conservative since too big to fail was gone, and there would have been more bankrupcies. Since Freddie and Fannie were gone, housing prices would drop. I presume there would no stimulus spending which would mean a trillion dollars less debt. Would that also mean a great depression? I was surprised to hear you say the Fed should have lowered interest rates. Wasn’t that the cause?