Government intervention in the credit markets has worked out so well that one economist thinks the government should start fixing the price of the S&P 500.
It is time for a greatly increased role for monetary policy through direct intervention of central banks in world stock markets to prevent bubbles and crashes. Central banks control interest rates by buying and selling securities on the open market.
A logical extension of this idea is to pick an indexed basket of securities: one candidate in the US might be the S&P 500, and to control its price by buying and selling blocks of shares on the open market.
Even the credible announcement that a policy of this kind was being considered should be enough to boost the markets and restore consumer and investor confidence in the real economy.
Critics will argue that this policy is dangerous socialist meddling. But I am not arguing that the government should pick winners and losers: only that it should stabilise a broad basket of stocks.
Before you laugh, keep in mind that this is quite the crackpot proposal it seems to be. Professor Roger E. A. Farmer, the economist who wrote those paragraphs, is vice chair for graduate studies in the department of economics at the University of California Los Angeles. And is his proposal really all that more radical than having the government buy up mortgage securities, recapitalize auto companies or ban short selling?
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