The Financial Crisis, Foreseeable and Preventable

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When a government bails out  an auto company or any bank, it essentially charges the central bank (our Federal Reserve System) with transferring the risk from that company to the government, i.e. taxpayers.  We’ve known this and many other basic economic truths for many years. Yet despite all the claims to ignorance by Washington and the media conglomerates,  here are some other economic truths that should have tipped off policy experts to the financial implosion in 2008.

We’ve Known for Thousands of Years

We’ve known for literally thousands of years that debts need to be periodically written down, or the entire economy will collapse. And see this.

We’ve known for 1,900 years that rampant inequality destroys societies.

We’ve known for thousands of years that debasing currencies leads to economic collapse.

We’ve known for hundreds of years that the failure to punish financial fraud destroys economies.

We’ve known for hundreds of years that monopolies and the political influence which accompanies too much power in too few hands is dangerous for free markets.

We’ve known for hundreds of years that trust is vital for a healthy economy.

Full Article

Of particular interest is the last statement above, that trust is vital for a healthy economy.  While this may seem obvious, actually creating trust and confidence in a market becomes more difficult as government interventions increase.  Governments intervene in markets when they fail, but when a government fails due to market intervention (stimulus/deficit spending), one has to ask whether such actions are sufficiently warranted.  Adam Smith issued a solemn, yet practical, warning against misdirected government intervention and the interests behind them.

“The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public.  To widen the market and to narrow the competition, is always the interest of the dealers.  To widen the market may frequently be agreeable enough to the interest of the public; but tot narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens.  The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.  It comes from an order of men, whose interest is never exactly the same with that of the pubic, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it” (Wealth of Nations, 287-88. Modern Library Edition)

Despite the misconception that economics is an extremely complicated field, it essentially provides a methodology for examining human behavior, primarily how incentives contribute to individual choice.  Incentives, according  to Steven Levitt and Stephen Dubner (authors of Freakonomics), are at the root of economic analysis and provide a window into the economic, moral, and social musings of any society.  Although our so-called policy experts would have you believe that such complexities are not for the layman and should be left to them, nothing could be further from the truth.  Economic analysis such as this is simply a matter of aligning incentives with outcomes.  Whether they be of powerful interests, government officials, or the people, incentives govern behavior and the market bears that behavior to society and the people.

At this point, only one thing remains clear.  The more market distortions we see from government intervention, the more difficulties we inherit in trying to make rational decisions based on market factors and the overall position of our economy.   The implication is this: government intervention does more harm than good because it distorts market signals and creates misaligned incentives.

If you are not privy to this information, I suggest reading and rereading the article above in its entirety.  I first found this article on Monty Pelerin’s World, a very worthwhile site if you are attempting the daunting task of sifting through the lies and manipulation coming from Washington and the media.

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About Jeremiah Dow
I have a B.S. in Politics, Philosophy, and Economics with a minor in Economics. I finished school in 2010 and am currently working on independent research in various areas including political and economic philosophy, government, and history. I am also currently looking for work in research, particularly the social sciences dealing with public policy work. I aspire to a top-level graduate institution, but would first prefer some professional research experience. Some of my primary influences are Ayn Rand, Noam Chomsky, and Howard Zinn among others.

2 Responses to The Financial Crisis, Foreseeable and Preventable

  1. Pingback: College Admissions - 50% of seats for boys and 50% of seats for girls is a discrimination?

  2. Pingback: » What happened to the global economy and what we can do about it Where Are We Again? (Pre-G20 Pittsburgh summit)

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