A Solution to the Crisis: Government or Markets?

Government

"We can solve this crisis - and we will," said Bush, in a speech at the White House...

"Here's what the American people need to know: The U.S. government is acting, and we will continue to act, to resolve this crisis and return stability to our markets," he said.

Bush said that the government's "wide range of tools" included the $700 billion bailout of the financial industry, which he said is "big enough to work." This plan will authorize the Treasury to buy bad mortgage-related investments from finance companies, unfreezing the credit markets by freeing up banks and finance firms to lend once again.

Bush also said the government has started to take steps to help homeowners to refinance into more affordable mortgages; cut the target for the federal funds rate; unveiled a plan to support the market for commercial paper; and has offered government insurance for money market mutual funds.

In addition, he said the U.S. government is coordinating its efforts with other counties.

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Markets

If government wishes to alleviate, rather than aggravate, a depression, its only valid course is laissez-faire – to leave the economy alone. Only if there is no interference, direct or threatened, with prices, wage rates, and business liquidation will the necessary adjustment proceed with smooth dispatch.

Any propping up of shaky positions postpones liquidation and aggravates unsound conditions. Propping up wage rates creates mass unemployment, and bolstering prices perpetuates and creates unsold surpluses.

Moreover, a drastic cut in the government budget – both in taxes and expenditures – will of itself speed adjustment by changing social choice toward more saving and investment relative to consumption. For government spending, whatever the label attached to it, is solely consumption; any cut in the budget therefore raises the investment-consumption ratio in the economy and allows more rapid validation of originally wasteful and loss-yielding projects.

Hence, the proper injunction to government in a depression is cut the budget and leave the economy strictly alone. Currently fashionable economic thought considers such a dictum hopelessly outdated; instead, it has more substantial backing now in economic law than it did during the 19th century.

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