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Government Intervention: A Cause Masquerading as a Solution Pt. 2

This is Part 2 in this series. For Part 1, check out "Government Intervention: A Cause Masquerading as a Solution Pt. 1."

Economists and “thinkers” advise that regulators convey a consistent policy towards distressed financial institutions to assure creditors that their investments are in good standing and that they do not need to liquidate them in turbulent economics times. Why should this be a function of government? Shouldn’t an investor assess the risks when culminating an investment and continuously update them as new variables arise? Investors who think that their investments are not government backed, either explicitly or implicitly, will do a much better job of researching and analyzing their securities. Why can’t banks and other financial institutions raise capital when needed from the private markets? If a firm wants to shore up its capital position in anticipation of financial distress, it should do so from private markets by offering better terms to investors.

The Federal Deposit Insurance Corporation (FDIC) provides a perverse incentive for banks not to do this. Can a bank looking for relatively cheap capital not offer a marginally better savings rate than its competitors? Milton Friedman, and by Ben Bernanke’s admission, showed that the Federal Reserve’s monetary policy was the main culprit of the Great Depression. So why do well-intentioned policymakers and government officials get a pass, while private companies and private individuals do not?

Federal Reserve monetary policy was a major cause of the Great Depression, although you may hear otherwise.

Investors who deal with undercapitalized companies should pay the price; likewise, investors who conduct their investments in a prudent manner with an eye towards risk management should be rewarded. Government policy, laws, and the Federal Reserve have created a system in which bad actors are given cover by their better-run counterparts and taxpayers. Friedrich Hayek said, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” Unfortunately, this has largely been ignored. It’s always in the best interest for “smart people” to carve out a niche for themselves and vault themselves into an esoteric position. Economics, especially monetary economics, is too complicated for the ordinary person. Perhaps it may be too complicated even for the sophisticated person. Intentions to mold the economy and form it in such a way to please even the good intentions of few become a “particle in a box” proposition in which the more you try to tame what you identify as a beast – the more it will try to escape from the cage that you have surrounded it in.

Individuals are the most informed about their economic position – not government. All these attempts to provide for the common good need not be questioned on the basis of intent – they only need to be on results. Many economists and “thinkers” today come from a long lineage of people trying to prescribe causes as cures. They seem to conclude government intervention as the solution to all the world’s problems – never considering it as a cause. Why would they? They’re smart. They know better. From a philosophical standpoint, this increasing government intervention and calls for more of it only decrease liberty. We seem to have come to a point where the philosophical debate in economics is over – Keynesian economics, interventionism, socialism… whatever you want to call it – has won and the debate is only over how much meddling is warranted and how much money should be spent in pursuit of it.

There could have been negative ramifications from the government not intervening in midst of the Financial Crisis and recession. But that intervention was not in a non-interventionist world. The cards had already been dealt. Government policy and Fed policy had already permeated the economy and influenced behaviors en masse. The government writes rules and regulations, which often have adverse effects on the same institutions they intend to protect and cement failed institutions as “too big to fail.” The Fed sets interest rates, which often feed asset bubbles and lead to lax borrowing standards. But this does not matter. These same bodies should be trusted with saving us from ourselves. Perhaps we need to be saved from them...

>Part 1
>Part 2

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