To Bailout or Not to Bailout: Is Free Market Economics Sustainable?

Wall StreetIn view of the current Wall Street crisis, America’s credibility as a bastion of free markets has come under the radar. The Fed’s recent bailout of AIG, Fannie and Freddie are perceived by many as a free market detour.

The government’s latest bailout news involves a plan to make the biggest intervention in the financial markets since the 1930s. Central to this plan would be a mechanism to bad assets off the balance sheets of financial companies or instead perhaps to create a federal insurance for investors in the money market funds. Additionally, the Securities and Exchange Commission is getting ready to propose a temporary ban on short selling financial stocks.

The Taxpayer Is Affected

Who’s being affected? The American taxpayer. Some have accused the government of using the bailouts as a method to privatize profit and socialize losses. However the downfall of companies like Lehman Brothers and AIG are already proving to have far reaching effects on the economy. Perhaps there is no choice then except for government intervention.

Are free market economies sustainable?

A free market economy refers to a system where the buyers and sellers are solely responsible for the choices they make. Free market gives the absolute power to prices to determine the allocation and distribution of goods and services. However, the notion of free market is mainly a theoretical concept as every country, even capitalist ones, places some restrictions on the ownership and exchange of commodities. So while the concept of free markets works in theory then, the truth is that its sustainability could well be questionable. Even though the U.S. has always been the hero of free market economics, the truth is that the government has stepped with bailouts in the past. The last time we saw this happen was during the Great Depression.

Will this new plan save America from another depression within the span of a century?

Related Posts:

Lehman Brothers Collapse: New Economic Architecture Required

Financial Crisis: What Will The Collapse of Investment Banking Mean for CSR?

World Economic Forum Honors Social Entrepreneurs and Calls For Fast Reform

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2 Responses to To Bailout or Not to Bailout: Is Free Market Economics Sustainable?

  1. Andrew says:

    Reenita,

    Whilst I do not predict another great depression for your country, I do believe that a mild recession may not be the worst thing for your country’s long term future.

    America has a large structural problem due to an unsustainable level of household debt. In order for your country to return to a path of long term sustainable growth, households need to reduce their debt to sustainable levels. For this to happen, a very significant period of adjustment will be required whilst households get their balance sheets under control.

    This process will not be fun, but it is a necessary precondition if America wishes to return to a path of sustainable growth. Americans should not fear or in any way try to avoid this necessary process.

    Remember back to the Asia crisis ten years ago. It wasn’t fun, but it provided the catalyst for fundamental reforms in Asian economies. The result – measured on a purchasing power parity basis, Asia has accounted for more than half of global growth during this decade so far.

    Structural economic adjustments are not fun and can cause temporary pain, but their long term results can be well worth it, and they should not be avoided.

    Cheers

    Andrew

  2. admin says:

    Andrew,

    Thanks for your comments.

    I do agree with you in that I think we have just about been saved from another great depression. And it is about time that Americans can buy real estate without putting any money down. It goes to show why Europe with its requirement for real estate down payment although affected, is at much less risk than America.

    Here’s to structural economic adjustments. As you say, it is well worth the effort to get to the desired result. let’s see where we get to in the next ten years.

    Reenita

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