Government Intervention Causes Market Volatility
August 30, 2011 by Sam Rolley
The Wall Street Journal reported on Monday that current volatility in the stock market is related to constant government manipulation and creation of a false sense of security among investors who are looking forward to more bailouts. A phenomenon, referred to as moral hazard, sparked sharp increases and then sharp drops in stock prices as investors awaited Federal Reserve Chairman Ben Bernanke’s Jackson Hole speech on Friday.
Though no immediate third round of quantitative easing (QE3) — or money printing — was announced by Bernanke on Friday, his speech noted that many of the economic problems in the United States are beyond the control of central bank intervention. The chairman also noted subtly that the actions that the central bank has taken will have definite and irreversible effects on the economy in the long term.
“Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view…” said Bernanke during his speech. “Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well.”
Bernanke seemingly advocated political policy that would further grow the number of jobs in the public sector. More government jobs will require the government to take on more debt, and require more quantitative easing, eventually. The liberal view of exciting economic growth through government intervention, the same government intervention that creates market volatility on a daily basis, creates worries among many free-market economists.
The argument against what has been dubbed the broken-window fallacy (i.e. disaster, war, widespread panic, social unrest and things of the like create government jobs) is that this creates an incentive for government to create these problems in order to drive the market. The suggestion of liberal economist Paul Krugman’s Aug.14 suggestion that a fake alien invasion would bring the economy out of its slump is an example of this economic fallacy.
Following the Jackson Hole address last week, economists who have based their economic principles on the Keynesian model have cried for more quantitative easing and more government intervention to create jobs. Krugman is among their ranks.