Articles on Issue Theme
Edward MORSE
Creighton University School of Law
Economic crisis often precipitates bureaucratic intervention when markets produce politically unpalatable outcomes. In the United States, government intervention in the housing markets for the purpose of making housing more affordable helped to create the current financial panic, in which falling home prices coupled with inadequate risk protections for holders of mortgage-backed securities and related financial derivatives caused losses to cascade through the international financial system. Government responses included loans and even investments to preserve illiquid and perhaps insolvent firms, which circumvented traditional bankruptcy approaches to dealing with insolvency. The economic crisis also raised the specter of insolvency for large domestic automobile manufacturers, which triggered massive government investment and intervention in the bankruptcy process to facilitate government plans. Intervention may be appropriate to address temporary liquidity problems, but intervention to correct insolvency involves serious and lasting consequences, which have significant moral and ethical dimensions that are often undisclosed by the political elites. Further, special problems are created when the taxing system is designed to permit a substantial portion of the electorate to tax others, but not themselves, to finance bureaucratic intervention.
ŒCONOMICA no. 2/2009
Keywords: economic crisis, government intervention, illiquidity, insolvency
JEL: H00, K30
Not Letting a Good Crisis Go to Waste: Undisclosed Consequences of the Politics of Change
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