Wednesday, February 11, 2009

The Problem to All Our Solutions

"So far, the measures we’ve taken to resolve this crisis have thrown the rational principles of finance out the window. We are going on a crash diet—contradicting mortgage contracts on an ad hoc basis and giving away handfuls of money—when we should be coming up with an eating regime we can live on indefinitely. Instead of making whatever short-term patches seem necessary, we might take a more systemic, market-based approach, such as stipulating that mortgage values always be linked to housing prices and adjusted each month.

"Speculative excesses are an endemic problem of the market system, but capitalism also provides its own self-correcting mechanisms. There’s no reason to abandon those tools now."

- Robert J. Shiller, professor of economics at Yale University and chief economist at MacroMarkets LLC. The quote is from Foreign Policy Magazine and pertains primarily to the housing crisis but it is applicable to the stimulus overall as well.

I'm still a bit miffed that the perception out there is that we have no choice but for government to intervene in the Great Recession. Recessions - no matter how pervasive - are self-correcting. That's what no one seems to understand.

Sure, this means whoever is the current president takes a huge hit in popularity by allowing markets to self-correct. Probably, no president is enough of a leader to muddle through such negativity in the face of misery.

It is a sign of how weak American democracy truly is that the mass of voters have no clue that when governments intervene in bull markets they help create bubbles and when they intervene in bear markets they inevitably burden us with more public debt. In the long-run debt and deficits lead to far greater misery than we would have known without them.


Government has very little place in economics. Government's role lies in opening up trade between nations and states, guarding against monopolies and fraud, protecting the rights of both owners and workers within the economy, stuff like that.

That the people want more, that they want salvation by government, is reflective of the Grand Society of Convenience and Immediacy our wretched consumer-driven culture has created. There is no patience. There is no understanding of risk. And for our ignorance as a democracy we get fallacy serving as prudent policy.

We asked for what is happening. We asked for what is ahead. The rhetorical distinction between "Wall Street" and "Main Street" is an illusion. There are no streets, just the few who seek to abuse their power and the many who only know fear in challenging times, leading the leaders to create the problem to every genuine solution.

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