“Intervention’s Potential Blindspots”
The clamoring by business executives and other prominent luminaries for significant government intervention has been extreme. The nearly unanimous theory is that, given the economic hardships now faced, as well as those that could be faced in the near future, “something needs to be done” on a significant scale, and quickly. While not openly repudiating the free market system, these intervention proponents espouse that this is a time when “the economy needs help.” Interventions of many types (including stimulus packages, “bailouts”, low-cost loans, job-creation programs, etc.) have been, or will be implemented, in sums ranging into the hundreds of billions of dollars each – sums that until the recent past have been shockingly unimaginable.
While the economy certainly appears weak, with potentially vast wealth destruction still awaiting, perhaps it is mistaken to eagerly embrace the shopworn playbook used in the United States in previous difficult economic times such as the Great Depression as well as the 1980’s.
While the purported benefits of the current intervention plans are easy to enunciate – whether it be to save financial entities, prevent damage to the financial system, save or create jobs, etc. – the potential negative ramifications of such intervention plans rarely are as clearly proclaimed – and when they are, it generally focuses on the additive effects such plans have on the federal deficit and debt, which warrants a separate discourse.
The following are some potentially troublesome aspects of interventions that should be heeded:
- It’s too easy - One of the main problems with the thought that interventions are beneficial is that the benefit is too easily realizable. “Prosperity by Pen” – the idea that benefit can be realized by simply signing intervention bills, and thereby providing the economy with the needed “boost” until a return to sounder economic footing occurs, is at best chimerical.
- How much is enough? / How much is too much? - Even if one believes in intervention, it can be exceedingly difficult to determine the appropriate quantity of intervention needed – especially given the rapidly changing nature of this highly complex economy. If some intervention is good, is more better? Does more intervention sooner prevent or forestall future economic problems? What are the penalties for too much intervention? These are all questions that need to be answered. As well, many of the issues hereby presented are interrelated – so intervening in one area may – quite unintentionally – create the need (or raise expectations for) intervention in another area – thereby ballooning the total intervention efforts.
- Is the intervention process being too heavily influenced by political pressures? It appears that heavy intervention is being driven by intense political pressures to “do something” about the current economic decline. In such an environment, from a political standpoint it is far easier to error on the side of caution by doing more intervention, rather than less – which seriously undercuts the proper method of determining the appropriate measure of intervention.
- Capital Market reactions – While it is dangerous to infer too much from short-term market fluctuations, the fact that various capital markets, especially the stock market, has not only failed to rally – but has also progressively sold off in the face of ever-greater announced intervention efforts – has to viewed disconcertingly. Furthermore, the startling, waterfall declines of commodities is also disconcerting. Overall the capital market reactions could be viewed as a collective red flag.
- Inability to measure benefits – Another major issue of intervention efforts is an inability to measure its benefits. The inability to measure the benefits of intervention is troubling, as it leads to a panoply of problems. One aspect of this is that all markets (including housing, employment, capital markets, etc.) eventually bottom, with or without intervention; it is just a matter of time and price level. Thus, to point to a market bottom and definitely attribute it to intervention efforts is nearly impossible.
- Effect on confidence – Intervention can wreak havoc on confidence, alternately driving it artificially higher as well as lower. Intervention efforts, especially those accompanied by strong pronouncements of their merits, that subsequently fail severely damage confidence. Once this confidence is damaged, it can be incredibly hard to restore. Just the fact that abnormally large bailouts are being announced undoubtedly undermines confidence, as peoples fears are buttressed. Another complexity regarding confidence is that there are different classes – investors, consumers, business owners/executives, etc. Managing the confidence and expectations of each class and how this relates to the whole, as they are interrelated, presents another challenge.
- Temporary or permanent “fixes” – Of paramount concern is whether the interventions will be “fixes” of a temporary or permanent nature. Current intervention programs are thought to be short-term in nature, but the concern is to whether they could inadvertently lead to a long-term “aid dependency.”
- Setting of precedents – Originally the bailouts were directed toward major banks and brokers under the pretense of having to protect the integrity of the overall financial system. However, as time has gone on, the recipients of aid has expanded into other areas. As the list of recipients widens, so does the rationale for providing more aid…as does the list of those expecting aid. Thus a vicious circle arises. If taken to extremes, basically any business or economic entity could claim duress because of poor economic conditions, and thus need – as well as claim entitlement for – aid. Some of the current arguments for providing intervention are exceedingly convoluted and weak. Despite these shortcomings, they are being given credence (and in many cases funding), thereby establishing a weak argumentative standard that can be copied and exploited by other parties. The mere fact that certain of the arguments are so fatuous relatively early in the “entitlement” cycle bodes very poorly, signaling that by the aforementioned vicious cycle effect the entitlements “spectrum” may prove to be very wide.
- Fooling the markets – One of the reasons that positive effects of intervention have been hard to come by is that the markets are not easily fooled by artificial measures. For example, a failing bank that has been “propped up” will not be viewed as favorably as one that has been “naturally” healthy. The implications are massive. For example, would the bank that has been propped up be able to enter into long-term contracts if the aid it has been receiving is viewed by the market as short-term in nature? The answer is almost assuredly no, as it should be. Even if other business parties were to believe that their transaction with the bank is somehow guaranteed, there is considerable cost and effort to retrieve such assets if the bank were to fail, be merged, etc.
- Fairness and equity – The recent bailouts have been seen by many as being unfair, as (at least so far) they seem to target only certain institutions and sectors. Thus these institutions appear to be “favored.” This perceived inequity is undoubtedly magnified given that the early bailout benefactors were in an industry, investment banking, which is known for having large concentrations of abnormally high compensations. Thus, it was not surprising that there was massive collective outcry over the first $700 billion bailout (largely viewed, and even named as the “Wall Street bailout”) that was voted upon by Congress and subsequently approved. At least in that instance, the populace was able to voice its objections to the perceived injustice of the “Wall Street bailout”; many of the intervention actions have not been subject to public vetting or approval, either directly or indirectly (via Congressional approval). If a citizen was dead-set against the original $700 billion bill, but at least was able to voice (via his elected representative) disapproval, what effect does subsequently enacted bailouts have on that individual for which he has no input? Frustration, alienation, and abandonment might ensue. What are the societal implications?
It is for these reasons, as well as a plentitude of others, that both the scope as well as the type of intervention efforts should be carefully considered. While it is easy to envision benefits of such interventions, the costs, both easily quantified as well as those more theoretical, can be immense and can vastly overshadow hoped-for benefits.
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