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The passage into U.S. law on October 3, 2008 [#permalink]
17 Aug 2013, 02:34
This post received KUDOS
The passage into U.S. law on October 3, 2008, of the $700 billion financial-sector rescue plan is the latest in a long history of U.S. government bailouts, dating back to the Panic of 1792. It also marked the fourth time in 2008 that the government interceded to prevent the ruin of a private enterprise or the entire financial sector. Many experts assert that the perceived catastrophic effect of financial sector ruin justifies this bailout. However, this assertion overstates the long-term financial benefits of such a policy. Such an assertion ignores fiscal and market realities. Federal politicians have granted themselves the ability to prevent companies from failing on the subjective, predictive assertion that to do otherwise would lead to economic turmoil. It is precisely because of such bailouts (and other government-sponsored economic interventions) that the United States has experienced such economic turmoil in the first place. The champions of interventionism fail to realize that their program implies the establishment of full government supremacy in all economic matters and ultimately brings about a state of affairs that threatens a sustainable free-market economy. If it is in the jurisdiction of the government to decide whether conditions of the economy justify government intervention, no sphere of operation is left to the market. Interventionist theory thus relies on a somewhat distorted picture of reality. Interventionist doctrine implies that the market is free as long as it performs precisely as the government intends. Thus, the theory and the practice of interventionism ultimately tend to abandon the principles that originally distinguished the free enterprise system from systems largely based on central planning, such as the former Soviet economy. In a truly free market, financial sector entities should be allowed to succeed or fail based on individual merit. The current planned use of public monies to save companies with questionable balance sheets, ethics, and business practices, may work in the short run, but the ultimate long-term result will be one of financial insolvency.
1.The author of the passage is primarily concerned with A. substantiating a claim about a historical event B. reconciling two opposing ideas about a recent policy decision C. disputing evidence the government uses to support legislation D. analyzing two approaches to private-sector bailouts and evaluating their methodologies E. criticizing a particular decision and the approach to fiscal policy it represents
2.It can be inferred from the passage that the author of the passage considers “central planning” (see underlined text) to be A. already included in most conceptions of interventionism B. based on free-market fiscal policy C. an alternative to interventionism D. a historical mistake not to be repeated E. a new approach to economic problems
3.The author would most likely agree with which of the following statements? A. Interventionism gives the government greater power than is generally acknowledged. B. An economy that involves frequent use of private-sector bailouts can still be described as a free market. C. The government was justified when it bailed out the states in order to ease the Panic of 1792. D. Companies with questionable balance sheets will, without government assistance, almost always fail. E. Government supremacy is preferable to a state of affairs where the failure of one firm may lead to the failure of many other firms.
Re: The passage into U.S. law on October 3, 2008 [#permalink]
28 Apr 2014, 19:55
The OA for Question 3 is particularly debatable as the author says "financial sector entities should be allowed to succeed or fail based on individual merit." So if the case of individual merit applies to companies in the private sector, shouldn't balance sheet cheating companies fail w/o govt. intervention?