Glamor Economics

Chapter 87

Chapter 12, Section 5 The Night's Watch Dozes, Too—Government Failure

The outbreak of the US financial crisis broke the "financial myth" of the former chairman of the Federal Reserve Greenspan.The loose monetary policy he pursued was regarded by more and more people as the "culprit" leading to the financial crisis.Critics believe that Greenspan's low interest rate policy led to excess liquidity, and it was this loose monetary policy that led to the real estate bubble and the outbreak of the subprime mortgage crisis.

Responding to a question from U.S. House Oversight Committee Chairman Waxman, Greenspan said he "found a flaw" in his thinking.Greenspan said: "I made a mistake at the time, thinking that banks and other companies that centered on their own interests had the ability to protect the interests of their own shareholders and the integrity of the company." Greenspan admitted that he followed the 18-year The tenets of "liberal capitalism" guiding the market have gone awry, and apologize for it.He concedes that the credit crisis is "much bigger than anything I can imagine".

Greenspan also defended himself: "Looking at the situation at the time, which one of the Fed's rate hikes and rate cuts was not necessary?" The low interest rate policy may have fueled the US housing bubble, but he also believes that the real root of the subprime mortgage crisis lies in the global economic expansion. It is the unprecedented high-speed growth of the global economy for a period of time that has led investors to underestimate the risks.

Justin Yifu Lin, Senior Vice President and Chief Economist of the World Bank, said that the reason why the financial crisis developed into a global economic crisis is related to the failure of the US government to handle the bursting of the Internet bubble in 2001. "When the bubble burst, the U.S. economy should have fallen into a recession, but that recession was very short. Why was it so short? Because the Fed cut interest rates to stimulate the real estate economy." 3.5%, down to 50%, the lowest point in the past nearly 1 years.He believes that the US real estate market was once highly prosperous because of this, "the cost is a bigger real estate bubble, which will be more difficult to solve after the bubble bursts."With the bursting of the real estate bubble in the United States in early 2006, the subprime mortgage crisis gradually emerged, and intensified into a global financial crisis.

From a certain perspective, the financial crisis in the United States is also a reflection of "government failure".In economics, government failure refers to the inefficiency of government activities or interventions, or the government makes decisions that reduce economic efficiency or fails to implement decisions that improve economic efficiency.

1. Government decision-making failure.First, the government's decision-making has not achieved the expected social public goals; second, although the government's decision-making has achieved the expected social and public goals, the cost (including direct costs and opportunity costs) is greater than the benefits; third, the government's decision-making has reached the expected social and public goals. Social goals, and the benefits outweigh the costs, but it has brought serious negative effects.

2. Expansion of government agencies and public budgets.Because government officials are also maximizers of personal interests, they always hope to continuously expand the scale of institutions and increase their levels, so as to correspondingly improve the level of their institutions and personal treatment, resulting in inefficient resource allocation and reduced social welfare.

3. Low efficiency of public goods supply.The inefficiency of providing public goods arises due to the lack of competition and profit motives.Due to the lack of competitors and elimination opportunities, public institutions can survive inefficient operation, which is not conducive to the optimal allocation of social resources.

4. Government rent-seeking activities.The government's rent-seeking behavior has caused serious social waste.Buchanan, a representative of the public choice theory, believes that under rent-seeking behavior, "those resources that could have been used for value production are used for those competitions that are just to determine the outcome of distribution." Therefore, rent-seeking behavior in general There is no configuration value, it is a pure social waste.The government's rent-seeking behavior is actually "power rent-seeking".That is, government officials regulate resources through various government actions to meet the interests of individuals or a group.In addition, the objective environment lacks effective supervision and management of government officials, which leads to social waste and government failure.

[links to related words]

Rent-seeking theory The government uses administrative power to intervene and control the economic activities of enterprises and individuals, hindering the function of market competition, thus creating opportunities for a few privileged people to obtain excess income.According to the discussion of American economists Buchanan and Kruger, this kind of excess income is called "rent", and the activities of seeking this kind of power to obtain funds are called "rent-seeking activities", commonly known as "rent-seeking". .

(End of this chapter)