Solutions May Be Worse than Problems

A poster I encounted this week was referring to the US Government.  It said something to the effect:  “If you think the problems we create are bad, wait until you see our solutions.”

I thought about the great depression that began in 1929 and lasted until World War II.  That depression was caused by the Federal Government, namely the Federal Reserve System, which collapsed the supply of credit and money by roughly 1/3 causing a simliar ruination of business and commerce.  The Federal Reserve board was made up of some of the most intelligent men of their time, but they misunderstood the results of their actions.  Indeed most of them went to their graves without understanding what they had done.

The welfare system, as it existed in the 60’s 70’s and 80’s had built in incentives that discouraged two-parent homes.  Higher payments were given to single mothers than to married women.  Ironically, the level of poverty in two parent homes is significantly lower than in single parent homes.

While the Fed contracted credit to cause the Depression, Federal legislation was primarily responsible for the overextension of credit and irrational lending policies that led to the recent housing bubble and stock market contraction.  The notion that nearly all Americans had a “right” to own a home was inherently faulty. 

The bailout of wall street and private New York business interests was a “moral hazard” in grand scale.  The “too big to fail” mantra is extremely hurtful in future financial panics.  The “loss” part of profit and loss is as important as the “profit” segment.  We have now nationalized risk for large banking and investment firms.  This is a big mistake and will only encourage these firms to take inordinate risks in the future. 

Free markets are the answer.  My insistence that government is the problem is not based on the fact that markets are perfect, but if businesses are left alone by government to prosper or to fail, the nonsense associated with failure will be less severe and will result in better future decisions.

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