October 3, 2011

Stephen Gordon: markets are volatile, but governments must not be

Filed under: Economics, Government — Tags: — Nicholas @ 12:53

In his latest Economy Lab post, Stephen Gordon explains why governments should not leap into the breach every time the markets fluctuate:

Politicians and pundits have jumped upon the recent flurry of bad news from financial markets to demand that the federal government “do something” — although just what that something should be is far from clear.

But no sensible government ever makes policy on the basis of a few bad days or weeks on the market, because financial markets are a notoriously unreliable predictor of the real economy. As the great economist Paul Samuelson once noted, “stock markets have predicted nine of the past five recessions”. I don’t know when he said this, but I first heard the quote when I was a graduate student 25 years ago, and its applicability seems timeless. To a very great extent, the day-to-day movements in markets are the result of random chance, and attempts to fit them into a narrative aren’t always convincing.

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