Government’s Takes An Active Role In The Economy
The current financial crisis has changed the role for many governments in capitalistic economies around the world. In socialist economies, the government normally takes a more active role but in democratic societies the standard is usually a more hands off approach.
The intervention comes at what may prove to be a steep price. Future investment may be allocated less efficiently as risk-averse politicians make business decisions. Whenever banks decide to lend again, they are likely to find new capital requirements that will curb how freely they can do it. Interest rates may be pushed up by government borrowing to finance trillions of dollars of bailouts.
“We’re seeing a more statist world economy,” says Ken Rogoff, former chief economist at the International Monetary Fund and now a professor at Harvard University in Cambridge, Massachusetts. “That’s not good for growth in the longer run.”
The government has had to spend an unprecedented amount of money to rescue the financial system and try to maintain economic growth in the face of falling demand. However, the more money being spent, the more control the government is exerting on the economy.
The surprising aspect is the ownership stakes the government is taking in banking institutions, something that would be more commonplace in a state run economy. Also, the repercussions could be fairly long term as we are likely to see the start of a new era of increased regulatory oversight.
The government is receiving a lot of criticism for bailing out failing companies. At first the government seemed to hold to a certain financial standard when it declined to help Lehman Brothers because the company’s asset were insufficient as collateral.
That standard went out of the window with the auto industry bailout. In this case there are serious doubts on whether the government will ever get paid back or not. Yes, many jobs were saved but it’s been obvious for years that this has been a failing industry and it’s not like this is the first time the government has had to bail them out.
There are obviously companies that are” too big” to fail but some are apparently more important than others. We all saw the havoc that ensued in financial markets when Lehman failed and if the government were to do it again they would probably intervene.
But where does it end? There are going to be more companies in danger of failing before a recovery happens but the government will have to weigh the cost to taxpayers versus the cost to the economy.
