Government / Market: Policymakers Try to Cancel Capitalism

For all of its flaws, global capitalism plays a critical role in the efficient allocation of scarce resources. The main mechanism for this function is the pricing of capital. While it may take years to show up, when capital is mispriced, bad things happen. Policymakers’ responses to the financial crisis, especially the significant role played by the major central banks in suppressing interest rates, will have long-term implications for the global economy. How quickly—or whether—debt and equity markets move back to a normalization of the pricing mechanism for capital will shape economic performance in the years to come.

In addition to adopting extraordinary monetary policy to suppress interest rates, the most significant responses to the financial crisis were moving debt from the private sector to government balance sheets, a substantial public-sector fiscal stimulus, and an overhaul of swaths of banking and financial market regulation.