Here comes another bail out package

November 28, 2009 Here comes another bail out package

All seems to point out that the effect of the first bail out won’t be enough to take us out of the crisis. Since the $700 billion was bad planed and, as could see in the news, is there some executives that have been reluctant to understand the word “recession” which means, for them, to lower their wages to help companies, even though, we keep hearing news about extremely high lousy bonuses. But the problem is not the bonuses, the problem is that those bonuses are given by companies that the U.S. government helped one year ago. So, they drive expensive cars, eat dandy food and pay their mortgage, at your expense. The question is very simple, Why the government should help all those that left you broke?, because is the way the economy works, and it’s necessary to avoid another recession.

The main concern about the new bail out will be, How big it needs to be to effective  and how should it be applied? the answer is another economic dilemma. When you intervene an economy, you spawn a mismatch in the market equilibrium, and sooner or later, we will meet another problem, and another recession.

Can you remember how criticised Alan Greenspan was for lowering the key rate years ago? The problems in not Greenspan’s monetary policy, as the economists know, the Keynesian economics propose the intervention of the State when the economy is in trouble, but a consequence of the interventions -low rates plus government expenditure- is the creation of market imperfections like bubbles or hyperinflation. As we can see, in times of crises, people  urge the government to do something, but when the market imperfections appear to take revenge, the guilty is someone from the government. But if you look well at the Greenspan’s numbers you figure out that the monetary policy wasn’t a consequence of the increase in the money supply, but is out there more reasons to lower interest rates, one of those, the increase in savings. The increase in savings can drive down  interest rates, since 2001, the annual year-to-year growth rate of MZM (money of zero maturity, which is M2 minus small time deposits plus institutional money market shares) fell from over 20% to nearly 0% by 2006. During that time, M2 (which is M1 plus time deposits) growth fell from over 10% to around 2%, and M1 (which is currency plus demand deposits) growth fell from over 10% to negative rates in the United States. So don’t blame Greenspan, if we want the government to intervene, we get what we deserve, market imperfections.

 

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