Bill Shughart, a Professor at the University of Mississippi and a Senior Fellow at the Independent Institute, wrote a critique on the Federal Reserve’s efforts to intervene our way to a better economy (via Don Boudreaux). His conclusion is that the end result of government intrusion into the economy will be more government intrusion. Shughart opens by noting Bernanke’s outdated notions of the effect of the New Deal on America’s recovery from the Great Depression. Recent scholarship on the Depression has suggested that the New Deal may have only delayed the eventual recovery.
He notes:
The credit crunch of the early 1930s, a time before deposit insurance, was precipitated by runs on commercial banks by customers worried about the safety of their life savings. The financial crisis of 2008 is starkly different. There is no need to restore public confidence in bad business decision making.
By intervening to “save” Wall Street, Bernanke is setting a dangerous precedent. Creating a higher risk-tolerance than before, as now it is firmly established that the Federal Reserve won’t let the big important financial institutions fail. Encouraging corporate irresponsibility is hardly a prudent policy for our “economic watchdog.”
As Shughart points out:
Bailouts encourage more risk-taking and eliminate the freedom to fail that is just as essential to a free-market economy as the freedom to succeed.
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