(p. A17) This year will be remembered not just for one of the worst financial crises in American history, but also as the moment when economists abandoned their principles. There used to be a consensus that selective intervention in the economy was bad. In the last 12 months this belief has been shattered.
Practically every day the government launches a massively expensive new initiative to solve the problems that the last day’s initiative did not. It is hard to discern any principles behind these actions. The lack of a coherent strategy has increased uncertainty and undermined the public’s perception of the government’s competence and trustworthiness.
The Obama administration, with its highly able team of economists, has a golden opportunity to put the country on a better path. We believe that the way forward is for the government to adopt two key principles. The first is that it should intervene only when there is a clearly identified market failure. The second is that government intervention should be carried out at minimum cost to taxpayers.
For the full commentary, see:
OLIVER HART and LUIGI ZINGALES. “Economists Have Abandoned Principle.” Wall Street Journal (Weds., DECEMBER 3, 2008): A17.
You have a nice blog, very interesting articles on Cuba and China.
I would argue that the market did not fail at all. The market is working well – it is valuing companies at anywhere from half of their 2007 value all the way down to zero value – because that’s what they’re worth. If anything, the amount of misinformation and official assurances of stability have delayed or altered the market’s pricing actions.
Capitalism and the market has not failed – it is exposing corporate incompetence and punishing companies that have been lying about the contents of their balance sheet. If the market’s price movement had not occurred, people would still be ignorant of the bad decision making within the institutions that are failing.
If anything has failed, it is the justice system. If the government wants to start solving this “crisis”, it needs to bring charges against Paulson for insider trading (massive intervention precisely when the market indicated the failure of his company Goldman Sachs), Dodd for ethics violations (Countrywide mortgage deal), and numerous congressional leaders who suppressed the truth about the risk within Fannie Mae’s holdings. It’s not the government job to run markets, even though socialists believe otherwise. The government’s job is to try to prevent theft, fraud, and other crimes and then to dispense justice when prevention fails.