December 30th, 2008

moon

Time Magazine's Recent article on our Economy

This shows a refreshing perspective. Finally the idea that government bailouts might cause us greater troubles in the future seems to be worming its way into mass consciousness, or at least into some of the more respected mass media. This article is written by Lawrence H. Officer, a professor of economics at University Illinois Chicago, and Ari J. Officer who has a Master of Science in financial mathematics from Stanford.

By continuing to throw money at the banks, the government is on the road to prolonging the recession and effecting massive inflation once confidence is restored and the economy then has too much liquidity. By making money available to the banks essentially for free, the Fed does not guarantee that the banks will lend out the money to businesses. There is no motivation to lend money at low rates when capital preservation (i.e., lack of confidence) is still a leading issue. Rates may be low, but the banks are not going to offer these rates to the individuals and industries that can make the most productive use of them — at least not until confidence returns.