Policy “meddling” fails

by Laura Ehrenberg-Chesler on June 19, 2012

in Credit Crisis,Debt,deficit spending,politics

Our economic research this morning from Ed Yardeni perfectly summarizes why all of the “policy meddling” has failed thus far to solve the problems related to the current economic downturn.

In my opinion, the real problem is too much policy meddling. Policymakers have been all too willing, ready, and able to provide lots of punch to keep the party going, i.e., more liquidity and more debt. But the punch is losing its punch because monetary and fiscal authorities continue to double-down on their meddlesome policies that have already failed. So central bankers follow rounds of unconventional monetary easing with more of the same. Rather than acting as leaders, politicians pander to their constituencies who want less “austerity” and more “pro-growth” fiscal policies, i.e., deficit-financed government spending.

In response to previous financial crises, policymakers were most successful in cleaning up the resulting mess when they harnessed market forces to do the job, even though plenty of people lost their jobs. But by doing so, the crises were resolved more quickly, thus averting a long period of economic stagnation and pain, a.k.a. “lost decades.”

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