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Policy of boom and bust

29/04/2014

The major defaults of the economic system called “Market economy” or “Capitalism” is that it enabled on one hand to pour into the economy too much financial liquidity at times of boom and overheated economy, by investing too much money in wrong and too expensive assets, and on the other hand at times of bust, when the economy needs liquidity to sustain employment, the system is rather greedy with helping investments in the same or similar assets for even very reduced price. This system a-priory has to cause bust and boom, situations.
The economist since the great depression of 1929-1933 which had disastrous consequences learned from the lesson, and the governments and the central banks took as their major task in economy (and be the price whatever it takes), to act as anti bust and boom instrument. This is why they made the economic stimulus of trillions that saved the banks and financial system from total collapse (luckily the collapse came during the time of republican presidency and they couldn’t resist this decision), and the quantitative easing that poured liquidity of government money into the economy as alternative to the private money from banks who stopped to borrow.
So if it is so easy to solve the economic crisis situations, what is the problem? Let the economy run on the waves of bust and boom, and whenever the bust comes the government interferes, and at the times of booms let the boys play and enjoy themselves. If economics would be only about mathematical formulas, probably it could work, but the truth is all the economic decisions have their moral-political aspects. And here lies the problem. Because it is morally and politically very hard to neglect the principle of punish those who do wrong and give tribute to those who has done good. And this is actually what happens when the government comes to rescue the “credit boomers”, the bankers who created a distorted financial system, that channeled the financial and material resources to wrong places to invest in wrong assets, and when the D day came, they did not have to pay the price for their wrong doings. The same happened to those who took the loans, without to ask themselves if and when are they going to pay them back. These Financiers and their creditors, who get loans of other peoples’ money enjoy free lunch twice. Once when they give and get these loans with knowledge that it will never be repaid, and second time when they enjoy the debt reduction, when the governments come to rescue them.
On the other hand those who use the wealth generated at times of boom to accumulate reserves for the bad times have to pay twice. First time when they restrain their activities during the times of prosperity and reduce by it their profits, second time at times of bust, when still they have to fulfill all their obligations, and get no praise for their responsible behavior in the times of boom.
Of course this system of Boom and Bust causes with each wave a major shift of wealth from one sector to the other, and generally from the decent and responsible entrepreneurs to the irresponsible gamblers, who happen to make bid on other people’s money. This is one of the reasons why the pension systems are all in deficit, the wages stagnate why the profits and mainly the rewards of corporate managers of publicly traded companies surge.
Isn’t it just unfair?

2 Comments
  1. ianmiller, thanks for your comment.

    Well even Keynes doesn’t have all the answers. His emphasize on the demand side of the economy, while preaching for government economic policy of anti boom and bust tendencies, could work under assumption that the economic resources are unlimited, and the main problem of governments economic policy is how the existing resources, mainly the work force, could be maximally utilized. But it did not work at seventies, when for several years the energy sources availability at feasible price seemed to become limited and the world economy fall into stagflation (deflation jointly with inflation). Then came the collapse of oil prices due to more efficient energy usage technologies, and again all looked fine, until at 2007 all the commodity and energy prices started again skyrocketing. This was due to sudden appearance on the market of two new great purchasing countries, China and India, whose energy demand was copying the US-Europe-Japan demand level, while the additional supply was not at hand.
    But commodities and energy resources are not the only and most important economic growth limiting factor, even if from while to while in the short term they seem to be causing serious threat to economic growth, but then new technologies until now successfully coped with the limitation they imposed, and all went back again to the normal. The more important limiting factor of the world economy is the world environmental unbalance problem. And as contrary to sudden lack of major commodity, it doesn’t seem to appear one day in full weight in short term and disappears with some technological solution. It rather seems to appear gradually, and since then it continues to increas its impact on the economy by increasing the production costs, either by additional investment needs or by taxation, that governments impose on economic facilities.
    Conclusion, the Keynesian economic model is a good model to prevent from policy makers in the central banks and governments to repeat the disastrous mistakes they have done in the years 1929-1933. But it has no answers to the economic policy needed today, when a drastic change in the consumers behavior is needed, to cope with the threat of environment resource depletion on the global scale.

  2. Keynes claimed to have a solution to the boom-bust cycle: in a bust, the government would pump money into the system, and in the boom, it would balance the books, so to speak, by taking it back out again. The “flaw” in this quite reasonable proposal is that while politicians are happy to prime the bust, they are less than happy in trying to cool the boom, because that loses votes.

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