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If you believe that government meddling in financial markets was responsible for the last recession and the lackluster recovery, you might be right. But probably not in the way you think.
Imagine what would happen in a free market if everyone suddenly decided that future economic growth would be very slow. The price of safe assets such as U.S. government bonds -- assets that pay off even in a low-growth environment -- would rise sharply. As a result, the real (inflation-adjusted) interest rate, which always moves opposite to the price of safe assets, would fall. In principle, if the demand for safe assets was strong enough, the real interest rate could go deep into negative territory.
Yet two government mechanisms prevent real interest rates from getting too negative. The first is cash: As long as people can hold currency, which loses its value only at the rate of inflation, they won't buy safe assets that yield even less. The second is the central bank's promise to keep the inflation rate low and stable -- at about 2 percent in most developed nations. As a result, people have little reason to hold any asset that yields less than negative 2 percent (perhaps negative 3 percent, considering that cash is bulky and hard to store).
In other words, governments -- by issuing cash and managing inflation -- put a floor on how low interest rates can go and how high asset prices can rise. That's hardly a free market.
[...] The right answer is to abolish currency and move completely to electronic cash, an idea suggested at various times by Marvin Goodfriend of Carnegie-Mellon University, Miles Kimball of the University of Colorado and Andrew Haldane of the Bank of England. Because electronic cash can have any yield, interest rates would be able go as far into negative territory as the market required.
[...] If cash were abolished, I would support the adoption of two complementary measures. First, instead of targeting a positive inflation rate, central banks could target true price stability by aiming to keep the level of prices constant over time. (To be clear, this would be disastrous unless cash were eliminated first.)
Second, currency does provide a service beyond being a store of value and a medium of exchange: It's anonymous and thus ensures the privacy of transactions. In its absence, governments would have to allow the private sector to offer alternatives with the same attractive features.
We've endured a deep recession and a miserable recovery because the government, through its provision of currency, interferes with the proper functioning of financial markets. Why not ensure that doesn't happen again?
Narayana Kocherlakota is a Bloomberg View columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.
(Score: 0) by Anonymous Coward on Tuesday September 06 2016, @02:02PM
the free markets has existed way longer than cash and bonds. it goes back to basic barter, and no government intervention of any sort is required for it to function normally
the problem rife today is that there is irrational fear of recession and that government must step in at all costs to prevent it, but those who hold this irrational fear really have no idea what a recession actually is let alone why they are a necessary part of economic cycles.
humans do stupid shit sometimes and make dumb bets. sometimes it happens collectively. malinvestment also isn't a new thing and will never be eliminated regardless of what governments try to do.
when a bunch of people make stupid investments and those investments go bad lots of people can lose a bunch of money (such as during the dotcom crash where a bunch of internet startups were heavily marketed but in reality there wasn't as much demand for their services as was touted). if risk is eliminated in favor of perpetual reward then it only serves to encourage malinvestment (hence the abundance of drunken wall street binging over the last two decades as a result of propping up of the stock market by the federal reserve via low interest rates and quantitative easing). when people make stupid investment decisions, they have to pay for them. otherwise the system becomes broken.
the purpose of a recession is to correct the mistakes of malinvestment and promote sound investment in the future, and if recessions are permitted to run their natural course without government intervention (as happened in the early 1920's) the pain is hard-felt but before long people learn from their mistakes, failed companies are bought and labor and capital redirected to more productive parts of the economy where they are really needed and the economy picks up again.
those who doubt this should read https://fee.org/articles/the-depression-youve-never-heard-of-1920-1921/ [fee.org]
(Score: 0) by Anonymous Coward on Tuesday September 06 2016, @02:53PM
my guess would be that all the "helping" the government does dampens(or hides) the pain from bad collective investments therefore encouraging centralization. This then encourages fascism as these corps get so big they become pseudo "states" clamoring for concessions. They put their moles in gov orgs and voila current day USA. Sycophantic slaves also buy from whichever is the bigger name(they must be better right?) instead of their local, more efficient small biz.
(Score: 0) by Anonymous Coward on Tuesday September 06 2016, @03:34PM
Yeah, extremes are always shit. No thanks.