re: US: Obama One Year after Elections (Harry Papasotiriou, Greece)

Harry Papasotiriou writes regarding the economic crisis:

Politics aside, the response of the Bush and the Obama administrations to the colossal banking crisis of September 2008- February 2009 has been on a continuum. Now that the panic of those five months is over, people can revert to their usual ideological disagreements. But during those five months, when it was uncertain whether major banks would survive, companies and corporations were uncertain whether their cash in those banks would remain available. Thus they cut production below sales, selling from their inventories, in order to ensure cash flow for their survival. Now that their inventories have been exhausted, the banking system has been saved (due to massive federal government intervention by both administrations) and consumer demand has not collapsed, they are drastically increasing production–hence the V-shaped recovery in production. But they have also instituted labor-saving measures, increasing their productivity, which means that unemployment will not decline soon.

Let me state that I tend to be a pro-free market conservative (Liberal in European terms). But in the face of a massive banking crisis of the kind that the United States experienced during those five months, I do believe in government intervention (as did Bush, Bernanke and Paulson). When panic takes over in the markets, disrupting their orderly and rational function, government intervention is essential. This part of Keynes’s insight, regarding the herd behavior of investors in capital markets, is best captured by his disciple Shackle, who focused on the psychology of panic situations. But once the panic is over, government should in my view retreat to a limited regulatory role and let the markets allocate scarce resources efficiently.