“If we don’t do something, the markets will crash.”
“To not act would be irresponsible.”
“There comes a time when the government must act.”
Turn on any channel, or read any blog, that deals with economic news and you will hear phrases like these. Business people seem to agree. Television commentators seem to agree. Politicians seem to agree. And, of course, economists seem to agree. Especially the president agrees that, if the government doesn’t act, something so unspeakable, so horrible, so terrifying, will happen in the economy that none of these people will describe it.
They don’t say, because they don’t know. They have not a clue what would happen to the economy if the government simply did nothing.
I certainly cannot predict exactly what would happen, if the government did nothing. But I do know two things for certain:
First, I know that artificial money expansion, government redistribution (taxing and spending), and government regulation together have caused this problem. More of the same, therefore, will not solve the problem. You don’t increase heroin intake to cure a heroin addiction.
Second, markets do work. The current crisis does not prove that markets fail. On the contrary, this crisis proves that you cannot fool the market in the long run. The market figured out that people had made malinvestments in real estate and the instruments that finance real estate. The market took steps to liquidate those malinvestments, which it must to get healthy again.
Likewise, when market prices realign with values based on the other resources in the economy, they will stop sliding and the economy will heal. Markets do not commit economic suicide. They adjust and move on.
Government intervention, on the other hand, will do one of two things: 1) the economy will “turn around” and we will see a bigger crash in the future; 2) the intervention will exacerbate the problems, which will lead to more intervention and more problems (ever hear of the Great Depression.)
Those who advocate the “we must do something, or else…” graduated from the Jim Jones school of economics. They want you to drink the Koolaid laced with money expansion, government transfers, and regulation.
Drink at your own risk.