Blaming Something That Doesn't Exist.

Since market forces began trying to move asset prices downwards in early 2001, when the irrational exuberance of the technology boom became apparent, the US Federal Reserve has tried every trick in and out of the book to prevent this downward trend. Some success was achieved by flooding the economy with cheap money but as wealth was actually destroyed in the longer run due to misallocation of capital it was only a temporary success. With one engine gone fiscal policy and out right protectionism has been engaged in to stimulate the economy and save the world.

Incredibly now after all these years of monetary and government authorities manipulating the economy the common consensus is that the current downturn proves that the free market has failed. Beyond that if we examine the economic system in terms of gains and losses over time and the production of wealth we can see that the free market approach is rarely allowed to operate and if it does it does not operate for long.

1) Socialise the gains and losses

An example of this would be Cuba after the revolution where all economic activity was directed by the government and hence all gains and losses were socialised. Unfortunately, the economic wealth of the country plummeted and when funding from Russia dried up after the Berlin wall came down it moved to the next model.

2) Socialise the gains, privatise the losses

When the Cuban economy broke down it moved to this system. In order to be able to quickly provide services to tourists Castro granted licences for some private activity (bed and breakfasts). The private system and network sprang up very quickly but incensed by the profits Castro quickly began to tax such operations heavily causing many of them to abandon their businesses. So the wealth effect began to decrease quite significantly

3) Privatise the gains, socialise the losses

This is the system currently in operation in the United States as the losses of private companies are being absorbed by the government. The effect on wealth of using capital to keep non productive companies in existence is clearly downwards. In addition the clear inequality of the system does open the door to some larger scale wealth destruction due to social unrest.

4) Privatise the gains and losses

Non distorted markets, which reward organisations that have made correct investment decisions according to consumer choice, and allows them to fail when they have not, creates wealth and minimises waste of resources. The only way to ensure that this system does not break down once underway is to prevent successful organisations influencing government to remove their competition. Due to the influence of wealth this system rarely exists for long.

As the taxpayers of the world are having their funds used by large private businesses that have failed it's important to note that their demands are done to actually prevent the working of the market and the free market that is supposed to be the cause of all the troubles is never allowed to exist.

Consensus Building, Government Action, Good Words, Bad Actions

When a financial crisis comes along the many mistakes government made on the road to the crisis become apparent. Luckily in the time of crisis the past must be left in the past and the government sets about trying to fix the mess.

In the face of a serious financial crisis, where assets are no longer worth what the paper magic of Wall St made them appear to be, there are only three actions a government can do.

1) Intervene a bit to attempt support these assets (there by supporting the paper magic of Wall St)
2) Intervene hugely to attempt support these assets (there by supporting the paper magic of Wall St)
3) Do nothing - ie allow market forces to determine the value of these assets

Obviously the third option is hard to consider for governments and their economic advisers. If the crisis was allowed to happen on their watch and their stepping aside is the best solution to the crisis then they are not the saviours but the problem. High positions attract people with high ambition and opinions of themselves so the 'do nothing' choice is hard to rationalise. They usually try the first choice and when that doesn't success it leads them strongly to the second choice. Even if things get worse they have the luck of never knowing the other outcome and claim that things 'would have been even worse' but for their action. There is also the belief that enough money and brain power will eventually move the economy toward the right outcome so it's just a matter of effort and time. Therefore the road not taken, even if it could have been better, was not a big blunder at the end of the day and if everyone can be brought along with the government thinking then all the better.

So it doesn't really matter what points are made, re inefficiency, fairness of bailing out bad banks, corruption etc the government action is going to happen and eventually the solution will be achieved. Unfortunately as Mises in Human Action points out nothing can save a society from ideological inconsistencies.

"Logical thinking and real life are not two separate orbits. Logic is for man the only means to master the problems of reality. What is contradictory in theory, is no less contradictory in reality. No ideological inconsistency can provide a satisfactory, i.e., working, solution for the problems offered by the facts of the world. The only effect of contradictory ideologies is to conceal the real problems and thus to prevent people from finding in time an appropriate policy for solving them."

For a quick resolution to all of this we have to hope that Mises is wrong which seems very, very unlikely.