Day By Day

Tuesday, October 07, 2008

Becker on the Credit Crisis

Nobel Prize winning economist Gary Becker has a nice piece in the WSJ on the current financial crisis. He is quite sure that we are not heading into a depression and whatever troubles emerge from the current crisis, they are definitely not of a scale comparable to those of the thirties:

Although it is the most severe financial crisis since the Great Depression of the 1930s, it is a far smaller crisis, especially in terms of the effects on output and employment. The United States had about 25% unemployment during most of the decade from 1931 until 1941, and sharp falls in GDP. Other countries experienced economic difficulties of a similar magnitude. So far, American GDP has not yet fallen, and unemployment has reached only a little over 6%. Both figures are likely to get quite a bit worse, but they will nowhere approach those of the 1930s.
He urges a limited series of reforms:
  1. Increase capital requirements for lending institutions.
  2. Sell off Fannie and Freddie.
  3. No more bailouts.
His major worry is that government guarantees will remove the moral risk involved with credit transactions and will thus encourage bad business practice. He is particularly upset by the bailout of the auto industry.

Finally -- no matter how much it is desired and predicted by liberals and hard lefties, Becker assures us that this is not the "final crisis of capitalism".

He's right.

Read it here.

Becker is also a blogger -- for a more extensive look at his thinking go to here.