Don’t Feed The Animals

Zoos almost universally have a sign that warns against feeding the animals. The point being that you destroy the natural fear animals have of humans and can cause them to begin to expect food from humans. We might be inadvertently causing the same sort of behaviour with our embrace of government intervention in the economy.

Exhibit 1 of such behaviour comes via FT.com in which a Roger B.A. Farmer, an economics professor at UCLA, proposes that governments undertake some benign manipulation of the equities markets.

So where do we go from here? The only actor large enough to restore confidence in the US market is the US government. The current policy of quantitative easing by the Fed is a move in the right direction but it does not, as yet, go nearly far enough.

It is time for a greatly increased role for monetary policy through direct intervention of central banks in world stock markets to prevent bubbles and crashes. Central banks control interest rates by buying and selling securities on the open market.

A logical extension of this idea is to pick an indexed basket of securities: one candidate in the US might be the S&P 500, and to control its price by buying and selling blocks of shares on the open market.

Even the credible announcement that a policy of this kind was being considered should be enough to boost the markets and restore consumer and investor confidence in the real economy.

Critics will argue that this policy is dangerous socialist meddling. But I am not arguing that the government should pick winners and losers: only that it should stabilise a broad basket of stocks.

This policy would still allow poorly run firms to fail but it would not allow all firms to fail at the same time. Although the free market is very good at deciding how many left and right shoes to produce, it cannot prevent systemic risk that arises from the psychology of herd behaviour. This is a job for Uncle Sam.

Much like zoo animals, we seem to be losing our healthy skepticism towards government as we look to it to manage more. It is easy to forget that the free food comes with a price-captivity.

Share

Related Posts

You can leave a response, or trackback from your own site.

Leave a Reply