Sir, From the perspective of someone in business, nothing that Martin Wolf says in “Economics failed us before the global crisis” (March 21) rings true—even when it is true.
Mr Wolf advises us not to believe in the efficient market hypothesis and in rational expectations—except that anyone in business knows that rates of return are timeless: 1-2 percent on savings, 2-3 percent on mortgage lending, 3-5 percent on venture capital, and that in a competitive market, that is an efficient market, investors expect profit to be pushed to 0.
He advises that economies would be more resilient if they were less leveraged. No. Companies not leveraged will be eliminated by those that are. A 5 percent return on 100 percent cash cannot compete with a 5 percent return on 100 per cent debt. A 5 percent return on $1m cash, $50,000, does not compare to a 5 percent return on $10m financed, $500,000. The return on leveraged investment is so high that owners of leveraged companies will lower the price of their products until their competitors are driven out of business.
Mr Wolf believes in a strong fiscal and monetary response to a recession. No. Business cycles must run their course. Except to prevent a financial crisis, intervention in an economy only prolongs a recession. You don’t offer a seven-course meal to someone who just threw up from overeating.