Our Government is Lost

A Lack of Understanding

Congress, the Executive Branch, the Federal Reserve and the US Treasury refuse to recognize that government actions directly caused the Credit Bubble, the Housing Bubble and the impending Economic Depression. By ignoring or failing to understand the cause of the problem, these policy makers are inappropriate to proactively navigate the economy through this financial crisis. Instead, the government continues to pursue policies such as stimulus checks, interest rate cuts, expanding monetary policy, government guarantees, loans, fiscal spending and bailouts which attempt to perpetuate or preserve the broken financial paradigm dependent upon expanding money supply and credit. These actions have little beneficial impact, but do create massive and inefficient economic distortions and have the possibility of lengthening and deepening the crisis.

Ignoring the Law of Unintended Consequences

Government refuses to recognize the Law of Unintended Consequences. Virtually every initiative undertaken since the crisis began has resulted in a string of distortions and encouraged unwise, inefficient and damaging behavior by individuals, companies and industries. TARP is just the latest example. A $700 billion bail-out intended to purchase toxic mortgage backed assets instead has been used for a laundry list of handouts. In recent days cities, states, the auto industry, homebuilding industry, consumer credit industry and insurance industry have all lined up to petition payouts. Investment banks, credit card companies and insurance companies have transformed themselves into banks to receive subsidies. The more committed the government is to performing bailouts, the more bailouts will be required. In the near future individuals will willingly choose to default on their mortgages, car loans and credit card balances in order to qualify for government assistance. No good deed initiated with taxpayer funds will go unpunished.

Unwillingness to Facilitate the Market Clearing Mechanism

Assets rose to unsustainable values, credit was too loose and leverage was out of control. The only solution to these problems is to allow the markets to work. Prices must fall, companies must go out of business and where excessive leverage was used, borrowers must be burned. No amount of government action can stop these excesses from reversing. The only logical, free market course of action is to facilitate the market clearing process. Encourage price discovery. Force companies to recognize bad investments. Instead, our government appears committed to perpetual attempts to prop up unsustainable markets rather than accept the inevitability of supply and demand, and the return of risk fearing rationality.

An Inability to do Nothing

If policy makers don’t have the intestinal fortitude to facilitate a recovery they should at least get out of the way and allow the free markets to operate. Left to their own devices these market will resolve the problems of overvalued housing, excessive credit and unsound businesses. The resolution process is painful and messy, but is preferable to perpetuating our problems through government mandates, price fixing and socialism.

Self-interested politicians have an inability to do nothing. It is not politically expedient. Inaction does not provide adequate political cover. Economic pain is inevitable, but policy makers fear that they will be perceived as culpable barring decisive action. When politicians act in the self-defined “best interests” of taxpayers, they can argue that policy makers did what they could and that things would have been worse had the government not acted. This fallacy perpetuated by self-preservation will produce a longer and deeper economic downturn to the detriment of all.