Real Economics 101

Many people over the years have said that economics can never be a perfect science. Economists like Keynesian have said that the best economy is one where there is no interference and things balance out themselves. But, if you keep following Keynesian economics then there would also be periods of severe depressions and high unemployment. So should governments step whenever there is a recession and try and avoid it? Did Bush’s government not do enough for the current financial crises?

The answer is although Keynesian economics is not the ideal solution from people perspective it is pretty much accurate. The root of the current financial crises lay down in the 2001 recession. The 2001 recession was one of the shortest and most well controlled recessions ever. Then, Fed Chairman Alan Greenspan reduced the interest rates to zero percent. This enabled the banks to take on more risk and hence give more loans. This had two impacts- The good part was that small business started growing at very fast rate. However the bad part was people who were not supposed to be getting loans started getting loans and credit standard fell way lower.

The other perspective is that the root of crises was the greed that is grown by Keynesian economics of totally free economy. They said the de-regulation regime followed by Bush Administration was responsible for the greed of Wall Street which was the root of financial crises. My perspective has been it was too much interference by Fed that led to the crises. Not only had they reduced the interest rates during the crisis but kept it low for a very long time after that. This overheated the economy and had wrong impacts. In a true Keynesian economy those rates should have been raised immediately, however government interference prevented it.

The government did all it could to prevent the crises, however that was the source of the problem. Their continued efforts to interfere like in Lehman’s case prevented a deep but small recession and led to much longer recession with far reaching consequences. The current government under President Obama is worsening the situation. Although it feels like we are out of the recession. What government has done is increased US debt levels to unbearable levels. We can hope for the best but this has led to real possibility of deflation occurring in the economy.  The government cannot afford a deflation or even a double dip recession so they will keep printing money. Hence gold might turn into the best investment. Look at GLD if you are looking at a safe investment haven.

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