Columbia International Affairs Online: Working Papers

CIAO DATE: 05/2009

Financial Crisis and Public Policy

Jagadeesh Gokhale

March 2009

The Cato Institute

Abstract

This Policy Analysis explains the antecedents of the current global financial crisis and critically examines the reasoning behind the U.S. Treasury and Federal Reserve's actions to prop up the financial sector. It argues that recovery from the financial crisis is likely to be slow with or without the government's bailout actions. An oil price spike and a wealth shock in housing initiated the financial crisis. Declines in stock values are intensifying that shock, threatening to deepen the current recession as U.S. consumers and investors cut their expenditures. An offsetting wealth injection from additional risk-bearing investors could initiate a quicker recovery. Thus, supporters of government intervention justify the bailout's debt-financed fund injections — in essence, they want to compel future taxpayers to join the group of today's riskbearing investors.