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Oct 30, 2008

Government Action Delays Recovery

Credit Panic: Stages of Grief
10/27/08 - WSJ.com Opinion

The power of government delays recovery. Enacting one arbitrary policy after another, moving this way and that, "solving" problems by directives, keeps private investment and productivity from making things better.

Read more ...

[edited] Uncertainty about Washington will slow the recovery.

Economist Robert Higgs says that economic recovery from the Great Depression was postponed for years by a "regime of uncertainty." He blames the uncertainties caused by extreme government economic intervention in the 1930s, by laws, regulations, and confiscatory tax rates. He writes that businesspeople were uncertain about government, afraid that their property rights, capital, and derived income would be decreased by government action.

Amity Shlaes wrote "The Forgotten Man", the recent best seller about the causes of the Great Depression. She agrees, and says our current economy is in a "recession of uncertainty." Markets will not be confident about the rules of the road until Washington accepts responsibility for politicizing banking over the past several years. [An unrepentant, ignorant Washington will probably repeat its mistakes and make new ones.]

Government intervention caused the current financial disaster (see We Guarantee It). Government intervention will delay any recovery. Don't trust your economic fate to politicians. Their motto is "If we don't know what to do, let's all agree to do something big. With other people's money."

Don't Just Do Something. Stand There.
10/31/09 - WSJ.com by Russell Roberts

The current financial crisis is similar to the government panic of 1932. The economy was weakening, and Herbert Hoover was doing everything and anything to change the situation, with disastrous results. What should the government do today?

[edited] A recession is coming (or has already arrived) no matter what happens in Washington. The attempt to forestall it may make it worse and turn it into another Great Depression.

Just as in the 1930s, there is no evidence that the policy makers have any understanding of what they are doing. They need to make way for the natural forces of repair. They need to let housing prices fall, let the imprudent firms go bankrupt, and let the healthy firms thrive and buy the sick firms as bargains.

Politicians have destroyed the rules of the game by acting without rhyme or reason. There is no reason to invest, to take risks, to be prudent, or to look for buyers if your firm is failing. Everything is up in the air. So, the only prudent policy is to wait and see what the government will do next. The frenetic efforts of FDR had the same impact: Net investment was negative through much of the 1930s.

The next administration is unlikely to do any better. Mr. Bernanke is chairman of the Federal Reserve. He is perhaps the greatest living authority on the Great Depression, yet he has failed to stem the damage. Messrs. Paulson and Bernanke are confronted with a sick patient. They have antibiotics. They have a scalpel. I see no evidence from the last seven months that they understand the underlying cause of the illness, or how to cure it.

Worst of all are the political incentives that are unleashed when Washington promises to spend a trillion dollars and more. ($1 trillion is $1 million million dollars.) No one can spend such money wisely. The information about who needs to be bailed out and who needs to fail is too complicated. Inevitably, such decisions will be more about politics than economics.

In my view, the government does not know what to do. No individual does, and no group does. No group can have a meeting and decide what is best. The government should only set simple, fair rules and get out of the way.

The productivity of an economy is built out of a complex fabric of millions of judgments, decisions, and risks. The government created a huge distortion and loss by guaranteeing home loans that could not be repaid, and by lending its authority to credit rating agencies that went along with approving strange mortgage bonds as AAA. There are now unexpected consequences that have gone far beyond the absolute loss.

The government has to stop using the money and credit of the population. We should let investors throw out the managements that were stupid and greedy, and support or create managements that are cautious and respectful of real values, untrusting of government labels and political decrees.

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