This week we learned that the American Senate has approved Barack Obama's proposal to inject some $800 to $900 billion dollars in order to sustain the US economy and get it out of its current recession. Soon after that Treasury Secretary Tim Geithner announced a package of three trillion dollars in an effort to clear up the mess left behind by banks and other financial institutions. "Never mind the fiscal deficit, let us get the real economy going again," seems to be the message the US Administration wants to transmit to the American people and the rest of the world.
Also this week, we had the former CEOs of four leading banks in the United Kingdom who were essentially made to apologise to a Select Committee of the House of Commons for not having been able to anticipate the crisis in the financial markets and for the hardship that is being caused to families in that country.
Meanwhile, French President Nicolas Sarkozy and German Chancellor Angela Merkel made a joint statement, saying that they would be presenting a joint initiative to the Czech presidency to address the current situation with a view to making the European economy stronger.
These are indeed very good intentions and indicate a willingness by governments of the leading world economies (on whom Malta tends to depend so much for the export of goods and services and for foreign direct investment) to resolve the current economic crisis.
However, no matter what governments have to say and try to do, the economic news that keeps coming is still very bad. It would be pertinent to ask why. Previously an announcement by a government that it was taking steps to inject money into the economy would have immediately created an upsurge in business and consumer confidence.
It is not happening this time. The reason is that markets are simply not acting rationally. They did not act rationally before, causing the financial crisis.
They are not acting rationally now. For more than two decades, we have had a number of economists around the world who have promoted the theory that markets (that is, consumers and business in their collective behaviour) are capable of understanding economic developments and through supply and demand decisions achieve an equilibrium that reflects economic efficiency.
Students of economics are taught the so-called theory of perfect competition and the various assumptions made that underlie this theory.
The economists that I am referring to have pushed governments to believe that we can make this theory come true, and for several years woe betide anyone who dared to oppose such a theory.
The problem was compounded, because theories, like that of perfect competition, are very easy to use when developing mathematical economic models.
And there were a number of such models to convince governments around the world that the good times could keep going on forever. True rationality would have actually counselled otherwise.
Once the bubble burst and several national economies came crashing down, it is becoming increasingly difficult to decide what to believe and what not to believe.
Thus, whereas rational thinking would tell you that, with rates of interest at levels that we had not seen for decades and with a rate of inflation that is going down, coupled with increased government spending, consumers and businesses should increase their spending, one is not seeing this happen.
Markets behaved irrationally before the bubble burst, and are behaving irrationally today, in spite of the various packages of economic stimulus that governments around the world are launching.
It is this lack of rational behaviour that is being displayed by markets that counsels caution in an economy such as ours.
Although we need to be nimble enough to take decisive action promptly, when such action is required, we equally need to be wary of quick-fix solutions that would only mean increasing the burden on our future generations, as is happening in other countries.