Thursday, July 9, 2009

The Case for Doing Nothing

Another look at the "crash of 08" by Jeffrey Miron.

Because housing prices have declined, some people and institutions are worse off. Maybe it’s the first bank in the chain that takes most of the hit. Or maybe the first bank passes some of the hit along because of its counter-party claims to some other bank. But that hit has to be taken. And in the U.S., it was a big hit indeed—plausibly several trillion dollars in housing wealth. The size of that loss doesn’t demonstrate a spillover effect; it just shows that somebody has to experience the loss that the economy has already taken.
The fundamental problem underlying the financial crisis was government policy. Instead of undertaking enormous new policies, we should try to fix or eliminate bad policies and focus on efficiency rather than redistribution. Doing nothing new and simply working with pre-existing procedures would have been much better than anything we’ve done so far.

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