Asset Stabilization Critique

Farmer advocates for the stabilization of asset prices in order to prevent unemployment and prevent financial crisis. I contend that losses in the financial markets are necessary as they ensure people aren’t leveraging too highly. If the federal government was to buy whenever prices of financial assets go down there would no longer be a market restraint on borrowing. Anytime a company or house defaulted on a loan instead of the bank paying the consequences for making a bad loan the government would step in and prevent losses in stock valuations. Preventing losses in financial markets would be stabilizing for unemployment and asset prices, but it would destabilize the system as it could incentivize companies to leverage higher and once again give risky loans.

I agree that the financial crisis was in part due to the rising asset prices; excessive loans and the creation of large amounts of debt caused the inflated asset prices. It was the unchecked lenders positive sentiments that led to the collapse of the housing market in 2008 causing the boom in asset prices. Farmers proposed asset stabilization will result in less variation and a lower unemployment rate but if implemented it is imperative that meaningful lending reform accompanies the asset stabilization plan; otherwise, the change in incentives could destabilize the entire system.

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