Saving Capitalism No Sure Thing If “Cure” Undermines Economy

What’s good for General Motors may not ultimately be best for the global economy.

The Bush administration’s $13.4 billion rescue of GM and Chrysler is a fitting finish to a year in which governments around the world expanded their role in the economy and markets after three decades of retreat.

The intervention comes at what may prove to be a steep price. Future investment may be allocated less efficiently as risk-averse politicians make business decisions. Whenever banks decide to lend again, they are likely to find new capital requirements that will curb how freely they can do it. Interest rates may be pushed up by government borrowing to finance trillions of dollars of bailouts.

“We’re seeing a more statist world economy,” says Ken Rogoff, former chief economist at the International Monetary Fund and now a professor at Harvard University in Cambridge, Massachusetts. “That’s not good for growth in the longer run.”

It’s not good for stocks either, says Paola Sapienza, associate professor of finance at Northwestern University’s Kellogg School of Management. Slower economic growth means lower profits. Shares might also be hurt by investor uncertainty about the scope and timing of government intervention in the corporate sector.

“If the rules of the game are changing, people are reluctant to invest in the stock market,” Sapienza says.

From Bloomberg
By Simon Kennedy, Matthew Benjamin and Rich Miller

Read the rest:
http://www.bloomberg.com/apps/news?pi
d=washingtonstory&sid=aDjmuEpDoctc

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