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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: 5, Insightful) by eravnrekaree on Tuesday September 06 2016, @03:02PM
Major problems with "markets" often occur when markets are the weakest, that is with massive centralized corporations. Markets work best with lots of small, independant businesses with 1-5 employees. It gives consumers enough choice that businesses are more responsive to consumers,and employees have more places to choose to work which creates a better employee-employer bargain.
People ignore the massive failures of centralized, planned economies. The fact is markets work best, they are not perfect, because they create financial incentives for businesses to serve their consumers.
I do agree that we need regulation to protect the environment from pollution, to protect worker safety, and to protect the consumer from bad products. This does not mean tht government should get involved with actually deciding what products should be made and so on, but as a cop to make sure that the businesses are being run without causing harm to people. When government taxes, it affects the allocation of resources in ways that can end up being contrary to the needs of consumers. Consumers deciding what they want and where to spend money really does create an economy where resources are allocated where the public thinks they should be rather than the government, which means more freedom for us to decide what we want rather than the government decide how to spend our money.
As for utilities and roads, these are natural monopolies, in this case I am for these being run by non-profits such as districts, authorities, counties and municipalities, which are required to be financially accountable. Before these can spend money, ridership and market studies have to be done to prove that they will be feasible. I am people who use roads paying for them, through gas taxes and through toll roads on all larger roads like bridges and expressways. Remember, all of this stuff has to be paid for, there is no free lunch. If you dont pay a toll you pay higher income or property taxes.
I am for nearly all of the retail sector being small business and other areas where larger corporations are unnecessary. We should have constitutional right for people to start businesses within 30 miles of their primary residence, but, towns should be allowed to keep out large corporations operated from far away out of the town in particular areas of economic activity, to reserve the retail and services parts of the local economy for its own citizens.
In the case where large corporations are needed such as with manufacturing, I kind of like the idea of employee owned corporations in a market economy, or the unions to compensate for the weaker employement market. Requiring corporations to be chartered with executive and management salary caps is also a good idea. This is far inferior to locally owned small businesses where it is not necessary to have larger corporations which require a large number of employees to carry out the function of the business. Quite frankly I do not think there is as much of an economy of scale that comes with consolidation of retail into corporations with vast territories, though you have more of an economy of scale being able to make cars on an assembly line in a factory that involves a larger number of employees. Plumbers, electricians, restaurants, retail, barbers, etc should all be locally owned small businesses.
I am for decentralization and markets, and locally owned small business, wherever possible, for locally owned businesses, except where it is vital to have larger corporations due to the expense of manufacturing or where you have a natural monopoly. The fact that we have wal mart and starbucks everywhere is sort of appalling because really these could be locally owned, sure you can have small businesses that are bad, but when you have smaller businesses you have more choices so the market will weed out bad actors. Franchises like mcdonalds are not quite as bad because there is more local ownership. If wal-mart treats its employees or consumers badly, there are far fewer alternatives to shop, you cant go to the next town over because that is dominated by the same one or two big retailers as well.
(Score: 5, Interesting) by Thexalon on Tuesday September 06 2016, @03:23PM
It actually doesn't matter about the size of the business, what matters is that there are enough players in the market on both sides that no single seller nor buyer can individually distort the market price. A market with 10,000 4-person businesses selling a product is no better for the efficiency of the market than 10,000 25-person businesses selling that product. It's when you get down to about 10 players in a market that you stop seeing an efficient free market and start seeing the effects of oligopoly (a few sellers) or oligopsony (a few buyers), where game theory now determines what prices will be rather than the marginal cost of producing the commodity in question.
The trouble is, most technological improvements help increase the amount of a product a business can produce before running into the dis-economies of scale. That causes market saturation, and eventually some of the businesses go bust, reducing the number of players in the market. Eventually, you end up with oligopoly as the norm rather than a competitive market as the norm.
The only thing that stops a bad guy with a compiler is a good guy with a compiler.