Originally I was going to post this as a comment on Anti-Dismal’s blog. But then I realised that I’m probably the busiest I’ve been in my life at the moment, and I need to make anything I can into a blog post. So here is a comment on this post.
One thing I would note when thinking about government intervention is that we should be looking at where a sustained market failure is most likely to occur.
The credit market was previously too lax – it is probably getting closer to normality now. Once the arbitrary fear of loaning is gone, these new, higher, interest rates are a structural shock that society will just have to deal with.
In the face of this structural shock we have another issue: sticky prices for some products. If the structural shock has reduced the marginal product of labour then we need lower wages (effectively potential output has fallen) – but if wages are rigid downwards then we will instead get excess unemployment.
As a result, government intervention, if appropriate, should probably still fall on the labour market – not the credit market. Governments role in the credit market should be more to do with the provision of information methinks, rather than subsidising risk taking.