“so george w bush and his 8 years of anti regulation government had nothing to do with this fiscal meltdown?”
I’m not sure that GWB’s IQ is high enough that he could grasp the concept of a free market even if he cared a whit.
Given that the basic information-signaling mechanism of the marketplace, especially financial markets, is interest rates, and given that the central bank has been relentlessly manipulating interest rates in recent years, Occam’s razor–if you every heard of it–would suggest that we look first at the simplest explanation: namely, that the two are related. Of course, Occam’s razor also demands that we consider the other statist manipulations that were going on at the same time, but let’s consider just that one here.
I wrote the following little piece on that subject last fall for someone’s Congressional campaign. O-as-D, it’s obvious that the sclerosis of statist ideology has already set in in your mind, but others here may find it informative.
**How Did We Get into This Financial Crisis? **
Many of our current politicians would have you believe that the current financial crisis represents a “failure of the free market.” The truth is quite the opposite. In order to understand how this dire situation arose, we need to look at the differences between a free economy and our current interventionist system, particularly with regard to credit markets and interest rates.
In a free economy, interest rates are a reflection of people’s “time preferences”—which is the economist’s fancy way of saying that consumers and producers would rather receive return on their efforts and investments sooner rather than later. Time preferences are stronger for some individuals than for others, which is why some people become debtors and others become creditors, giving rise to credit markets.
Interest rates have a profound effect on the allocation of resources throughout an economy. When interest rates are high, economic activity is oriented primarily toward providing for immediate or short-term consumer needs, and less value is attached to long-term durable goods, such as land, housing, and industrial plants. When interest rates are low, economic activity is diverted more toward long-term projects, and the value of land, housing, and other long-term durable goods soars.
In our interventionist economy, however, interest rates are determined not by the natural time preferences of the free market, but by a centralized Federal Reserve System, often operating in concert with central banks in other countries. Politicians use this system not only to finance their pet projects, but also to create a false illusion of prosperity through artificially low interest rates. Inflationary, “easy money” policies are politically popular since they lead voters to believe that the economy is humming along nicely. With capital easily available, the future looks rosy and businesses invest readily in ventures whose payoff may be far down the road. With land and housing prices rising seemingly without limit, mortgage rates relatively low, and no end to the economic boom in sight, consumers are eager to borrow in order to partake of the apparently prosperous future ahead.
Unfortunately, a single dose of monetary inflation does not sustain this illusion indefinitely, and as the inflationary policy continues, prices must eventually rise. In order to avoid a wage-price spiral, officials are obliged to hit the brakes. The resulting abrupt increase in interest rates catches both producers and consumers by surprise. Malinvestments in long-term projects, prompted by the previous inflationary boom, are now exposed, causing businesses to go bankrupt. As we have seen recently, the credit crunch hits consumers as well. Homeowners are caught in a “double whammy,” with housing prices plummeting even as financing becomes unavailable.
Certain politicians in Washington are trying to get off the hook by characterizing the situation as a failure of the free economy. In reality, it represents another failure of their own statist, anti-free-market policies.
Rather than bailing out these politicians, let us give economic freedom a chance. Let us vote in politicians like *****, who support a turn to sound-money policies and a free-market banking system.
