How can we control the economic crisis?How can we control the economic crisis?
Any response to an economic crisis usually falls into two categories--the well-known "government has to do something!" and the unpopular "leave it alone." Which is the correct method is debatable; certainly several of the causes of the Great Depression were due to unscrupulous business practices, that should have been outlawed as they were tantamount to theft ("Stock Pooling," for one) and government should have taken action. Unfortunately, what actions the government does take exacerbate conditions; financially supporting a failing industry does nothing but prolong the agony until complete failure, and when failure comes, its undoubtedly worse later than earlier. The current authorization to "bail out" failed industries will create more difficulty in the long run; "Leaving it alone" and letting them fail, although politically unpopular and difficult in the short term, may be the best answer. Let the crisis come. Bite the bullet! Take your medicine! And once the crisis has run its course, allow resources to be spent on developing new industries, instead of propping up old.
If you are talking about the current one, the way we get control is by stopping the housing crisis. The housing sector is bringing down every other sector. We need regulations for banks to prevent them from scamming their customers, and we need programs to keep people in their homes and prevent foreclosures. As long as the credit markets are frozen or moving about as quickly as sludge, we will never get out of this. We need to fix the housing markets and watch the ripple effect reverse. Companies will begin doing more business, people will be employed and start buying, and things will get back to normal.
There are no simple answers to this question and no easy way out of the problem. However, I believe there is one important area which has not received enough attention of government leaders and policy makers.
Wide fluctuation in economic situations, as reflected in swings in some major economic indicators like rate of unemployment, property prices, and stock market indices, is common in all countries of the world. These fluctuations, particularly in stock and property prices, are much more than can be expained in terms of actual state of the economy. In India stock market index went up more than six times in just about four years, just before the stock market crash. Actual improvement in economic performance or real value of the all the companies represented by these stocks simply cannot go up to such an extent. The real cause of fluctuations is changes is perceptions and expectations of the company in minds of people which highly overestimates the real value.
When people are optimistic about future of the company, the prices rise above the real values, the leader of government and business tend to fan the fire of exaggerated optimism of people for their own selfish reasons. Government leader project the situation as proof their capability to lead the country, and business leader get busy in making huge profits by selling their stocks to public at highly inflated prices, while the going is still good.
But the prices cannot continue to rise for ever and some time or other the overinflated balloon of unrealistically high price rise bursts. This is what has happened in the current economic crises gripping most countries today.
To get over the immediate crisis it is necessary to restore public confidence and develop schemes that will enable them to profit from contribution to the revival of economy. If the bailout packages just manage to revive the sick company, without giving people a share in rise in value of the companies bailed out, it will be unfair. Also it is not going to help rebuild public confidence.
In the long run, ways must be found to prevent unethical exploitation of general public by political and business leaders by unrealistically inflating stock prices for their personal gains.