This is an argument that has been debated for many years in the academic world and I imagine it will be debated in the future. We have heard arguments on both sides that are persuasive. The business world does not operate in a classroom however, but it operates on Main Street. The business world does not operate with a hypothetical public, but with a real life human public. We will feel the results of decisions made by theoretical and political minds as opposed to market and business minds for years to come.
These theoretical and political minds decided that Tarp was needed to save the economy. These same minds determined they could and should chose winners and losers by determining who was too big to fail and who was not. These same theoretical and political minds determined interest rates should be kept artificially low, the economy should be pumped with huge amounts of money, and the government should borrow exorbitant amounts of money. They told us the result would be a robust rebound from the mortgage debacle these same theoretical and political minds created with the idea all people should own a home regardless of ability or willingness to repay.
Today we are in a stagnant economy with our labor participation rate at all-time lows. We are told the economy is expanding, unemployment is lowering, and things are going to become much better. We have been told this for several years now. We are also told that the inflation rate is low and will stay low and so interest rates can start to be raised. Inflation is high and has been high. Go to the gas station, go to the grocery store and you will see what inflation is. Of course these costs have been determined to be volatile and so will not be in the core calculation of inflation.
With the increase in interest rates we will see more of a slowdown in the housing sector. The government will need to pay more on its debt of almost $18 trillion. A small increase in the interest rates means higher taxes or more borrowings to pay the interest on this increasing debt. Both higher taxes or more borrowing are bad for the economy. We will see higher inflation. Are we coming back to the days of double digit inflation and double digit interest rates?
This scenario has come about because of economic decision being made by theoreticians and politicians. If these decisions had been made by the market place, we would have recovered years ago. The businesses making good decisions would be stronger and those making bad decisions would be gone. America would be better for it. Of course, if the businesses would have made the decisions in the housing market based on market conditions and not government demanded conditions, the collapse of 2008 would not have taken place.