Comments on: Warren Buffet on why the Goverment should be a market maker of last resort

By: Nicholas Gruen

Nicholas Gruen — Thu, 25 Sep 2008 14:33:19 +0000

Well that’s the trick Rafe, you have to try to make sure that central market makers don’t make the markets too high. Just like you have to hope that central banks with the power to set short term interest rates don’t screw it up. It’s a risk – like every other financial arrangement. One has to decide where one wants the balance of risks.

But the state is the best bearer of risk there is in an economy. We should build institutions to see that that capability isn’t ignored, but rather is prudently used. If it is prudently used, the state will make a lot of money for itself, at the same time as improving the functioning of the economy. It’s called ‘gains from trade’.

By: Rafe Champion

Rafe Champion — Thu, 25 Sep 2008 14:16:34 +0000

Nicholas, how does Buffet’s approach stand if the assets (the houses) are overpriced by something like 30 or 50% before the bubble bursts?

And how does the injection of a trillion dollars of Fed funds play out in terms of inflation and the value of the dollar? Gee, a trillion here and a trillion there, soon we will be talking real money!

Someone has flagged Medicare as the next candidate for an injection of funds. Not surprising, the cost of health care has been projected to absorb the whole of the NSW state budget in a few decades.

By: cjoye

cjoye — Thu, 25 Sep 2008 07:13:23 +0000

As Nick knows (see his op-ed in the Age in support of our proposal here) Joshua Gans and I have been arguing for a long time that governments need to irregularly intervene in key economic markets and provide the public goods of a minimum level of liquidity and price discovery. See here for a summary of our ideas.