Living in a “socialist” country and having heard slogans like “garibi hatao”, nationalisation, etc. there was some chance that RBI governor does not believe in market economics. But USA? Aw, come on Ben has to believe in free markets, or so we thought. No. He does not.
He comes up with aspirin for patients who need a triple by pass surgery. The Fed is clearly responsible for keeping the interest rates too low for too long and helping the real estate bubble to build. Firms like Bear Sterns should be allowed to die.
Let us take an example. Say there are 5 auto manufacturers – ranked A to E – where A is the best and E the worst. All of them put together make 5Lakh cars. Now if the demand was only for 4 Lakh cars, it is possible that the biggest sufferer is E. So E will bleed and slowly die depending on how well he is capitalised. This will bring the capacity in the industry to 4L cars – and all the other manufacturers will start earning some profits. Sounds simple, but broadly this is how it is supposed to work. Enter BIFR.
BIFR was another stupid socialistic heritage which allowed manufacturer E to be protected against creditors, interest was waived for a certain period, etc. and this allowed E to live a little longer than what the cruel free market would allow. This actually became a hindrance for the freee markets.
Ben by saying Bear Sterns is too big to fail, he has increased the pain in the system. People who speculated wildly have to die – cruelly that is the reward for those who were careful. If excesses are not punished, there is also a moral hazard. Kids will grow up irresponsible and blame Ben!
Imagine your spouse / kid / parent saying “I over spent because credit was available, and the interest rate was only 2% per month”. It becomes your duty to remind them, that it is the prinicipal, stupid, not the interest that is the problem. Only if Ben would wake up.
but surely he has created pain. Those of us who have had a check up KNOW that we need a surgery to remove the 3 blocks. Those who have not gone for a check up are watching TV and hoping Ben is right. No he is busy creating a gold bubble, an oil bubble, and a real estate bubble – this time he is ensuring that the whole world is in its grip. There could be a crash landing – beware seat belts are of no use once the plane hits the water!
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