Theory

America is experiencing biggest economic downturn since the Great Depression. The mortgage crisis is one of the main factors that caused this economic crisis. After housing price and stock index plummeting, the only thing that keeps increasing is people’s attention toward this issue—how should we fix this? Which bailout plan works best? Etc. However, the focal point of the argument is “regulate or not”. Deregulation and free market are what most Americans have long supported. The classical macroeconomic theory supports market solutions to problems and laissez-faire (minimal) government policies. Adam Smith compared market with an “invisible hand”. He believed that market will cure itself. However, if we choose to keep deregulating market, there’s a possibility that the market will go wild and crisis like this will happen again. On the other hand, we have supporters of restriction. Companies as Fannie Mae and Freddie Mac did too much damage before government had chance to take over them. Nobody can believe those companies that they will not do the same thing again. But, just as I mentioned before, restriction of the market deviates from the principle Americans have long embraced. And in the long run, government’s intervention will cause allocating and producing inefficiency.

So there are two choices—we either wait or do something. We can’t take subprime loans away from consumers because there are people who still need them. So the only way is to exert restriction on mortgage companies. I’m not meaning that this restriction will last forever, but at least for now we need some control over these companies. Central controlling doesn’t mean we are stepping into a socialist country, which most Americans fear. The basic different between a socialist country and a capitalist one is not the means but the purpose of implementing policies. Now government intervention is only the means to achieve a capitalistic purpose. So there is no need to worry. People may believe in business’s cycle that market has good times and bad times, but we have no idea how long will the bad time last. Just as macroeconomic theory failed to save the Great Depression, it might not work now.