Governments have happily gone along with Keynes’ fallacies. It gives them a licence to levy a hidden tax by permanently inflating the currency. Governments love inflation for the same reason that you might like having lots of other people’s money spent on you and your pet projects. The difference is, governments can.
Where does the real wealth come from if during the boom you sell your house for a capital gain and buy real goods with the proceeds? The answer is, it comes from everyone in society who uses money - the pensioners, students, single mums, the kids who work at McDonalds, the homeless and unemployed, the farmers and shop-keepers, the factory workers, shop assistants and truck drivers. Government takes it from them by inflating the currency and gives it to people who speculate on real estate, or whatever is the capital good that’s in fashion in government policy.
The invisible hand of government
The problem with the “blame the market” theories of the financial crisis is that they see no connection between the fact that government has a monopoly control of the money supply, and its economic consequence.
Advertisement
According to these schools of thought:
There is no connection between the boom and bust on the one hand, and on the other, the cosy relationship by which government, through inflation, requires the banks to transfer money from the whole population to government, while, through inflation and regulation, protecting the banks profits.
No connection between the fact that government has for decades been regulating interest rates below the market rate, and the boom or bust.
No connection between government policies that have encouraged and required banks to lend hundreds of billions of dollars to tens of millions of people who can’t afford to repay, and the boom or bust.
No connection between government policies of “stimulating” the economy by pouring trillions of dollars based on nothing but thin air into favoured industries, and the boom or bust.
According to this line of reasoning, it is nothing but a strange coincidence that both the boom and bust arose in a government-favoured industry (housing), in government-sponsored enterprises (Freddie Mac and Fannie Mae), with money that government conjured out of thin air, for a government policy of “making housing more affordable” (sound familiar)?
All these have nothing to do with the boom or bust, which just arise mysteriously and spontaneously out of “unregulated capitalism”.
Advertisement
Yet prices are the steering mechanism of any market. By regulating the price of money, government has in fact been regulating the financial markets all along in their quintessential steering mechanism.
This is not a crisis of “unregulated capitalism”, it is a crisis of regulated capitalism, of interventionism, of government “economic management”.
Failure to predict
All the government institutions responsible for the crisis also failed to predict it. As recently as early 2008, the US Treasury was saying the economy is fine. And after all that, they still say they need a “stimulus package” to fix the problem!
Discuss in our Forums
See what other readers are saying about this article!
Click here to read & post comments.
5 posts so far.