Intervention is the Problem

Economics in One Lesson is an excellent book by Henry Hazlitt that attempts to help people to correctly think through any economic situation. The one lesson is reduced to a single sentence on page 5 of the Mises edition:

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

The lesson can be applied to the bailout and the current economic situation.  The government seems to believe that the problem is a lack of credit.  The answer they say is to expand available credit through the bailout passed Friday and to increase the money supply through the Fed.  Reuters reports:

The U.S. Federal Reserve said it would begin paying interest on reserves banks hold at the Fed, a move that would allow it to keep flooding markets with cash without driving its benchmark federal funds rate below target (U.S. urges global action on credit crisis).

This misses the bigger issues and ignores “the longer effects of any act or policy.”  The current crisis was caused by easy credit – not lack of credit.  Subprime mortgages were increased because that is what the government wanted. Home ownership was praised at a great end unto itself while policymakers ignored the crisis that would come when the easy money bubble would burst.  President Bush in his 2004 State of the Union said the following:

Americans took those dollars and put them to work, driving this economy forward. The pace of economic growth in the third quarter of 2003 was the fastest in nearly 20 years; new home construction, the highest in almost 20 years; home ownership rates, the highest ever. Manufacturing activity is increasing. Inflation is low. Interest rates are low. Exports are growing. Productivity is high, and jobs are on the rise. (emphasis added)

Interest rates were and are low because the Fed artificially keeps them low to stimulate the economy.  Home ownership was high because interest rates were low.  Now it is obvious that many of these people could not afford the homes that they were encouraged to purchase using below market interest rates.

All this to say that the government continues to do now what may help now.  It seems good now when the stock market is high, interest rates are low, housing is high, prices are high, wages are high, and a lot of other government mantra.  The problem is that these things of themselves mean nothing.

Government intervention creates many of these “good” situations that always lead to crisis.  The government and the people in government cannot see the future or forecast the economy.  They may guess right for a while but eventually they will make a mess of things.

When government “gives” money to one sector of the economy it always take from someone else.  They either rob the rich, the poor, our grandparents, our grandchildren, or all of us through high taxes.  Most Congressmen and Senator’s proved by the bailout vote that they want a solution now no matter what the cost later (and some just don’t understand economics at all).

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2 Responses to Intervention is the Problem

  1. Joe says:

    Great post. Interestingly enough, because the market is still in a free fall, even after the “bailout,” the Fed today hinted at lowering rates again. Would that put them “below target,” or did they just lower the target?

  2. Joseph says:

    I think that means they would be lowering the target. Then they could flood more money on the market with loans to banks and paying interest to banks. Assuming I am understanding these aspects correctly.

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