A problem of regulation?

The financial panic that has engulfed the planet is considered by politicians, bureaucrats, journalists and mainstream economists to be a problem of regulation. I find myself in the uncomfortable position of having to agree with this gang of opinion makers, but it is not a problem of insufficient regulation, inadequate regulation, unenforced regulation, out-dated regulation, or anything of the kind.

A Crisis of Global Statism

Guaranteeing large financial firms from failure will bring calls for regulating them still more tightly. This is an old story: past political interventions create the reasons for new ones.The present financial turmoil is really a failure of global statism. Socialism has failed once again. Let’s try capitalism.

Can the Rescue Plan Fix the US Economy?

At the root of the problem are not mortgage-backed assets as such but the Fed’s boom-bust monetary policies. It is the extremely loose monetary policy between January 2001 and June 2004 that set in motion the massive housing bubble (the federal-funds-rate target was lowered from 6% to 1%). It is the tighter stance between June 2004 and September 2007 that burst the housing bubble (the federal-funds-rate target was lifted from 1% to 5.25%). The rescue plan, meanwhile, could create the mother of all recessions.

Hayek speaking yesterday (or might as well be)

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.

Bailouts and Economic Calculation

In his seminal article on economic calculation under central planning, Mises showed that a central planner cannot allocate productive factors in a manner consistent with consumer demand because the planner does not have the ability to calculate in terms of market prices. Market prices come about as the result of a competitive bidding process among decentralized private property owners who are seeking to earn profits.

Understanding the Crisis

What caused this? It is a simple question, and yet answers are all over the map, as you might expect. Here’s mine in two words: fiat money. The word “fiat” means “out of nothing.” Money out of nothing is money that is eventually worth nothing. The possibility of precisely that happening emerged in August 15, 1971. Since Nixon severed the last tie of the dollar to gold, the world’s monetary system has not been restrained by anything physical. We’ve depended on the discretion of central bankers. We can’t trust that, and this crisis shows precisely why.

The Idiocy of Wall Street: Applauding Its Own Demise

Given the economics discussed below, and the government’s lack of credibility to date, the real costs will now clearly run into the high trillions. The question is, who will get stuck with the losses and how will that loss-distribution process be handled? For Wall Street to applaud the prospect of the upcoming events is lunacy. Why is anyone listening to Paulson and Bernanke?
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