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Source link: http://archive.mises.org/10418/why-the-current-policy-prescriptions-cannot-possibly-work/

Why the Current Policy Prescriptions Cannot Possibly Work

August 7, 2009 by

The diagnosis can be stated in just one sentence: Governments have caused the financial and economic debacle by suppressing the free market. And the recipe for ending the debacle reads as follows: Only the free market, and not the government, can end it. FULL ARTICLE

{ 9 comments }

Barry Loberfeld August 7, 2009 at 8:10 am

Re: “The Only Way Out”:

[T]he ideal of laissez faire continues to thrive, most notably within the libertarian movement, which poses a challenge on all levels to the dog-eat-dog grapplings of the special interest groups. In doing so, they are reflecting the wisdom of one of their classical liberal forebears, himself something of a founder of a new “movement,” who warned that whenever “we depart from the principle of equal rights, or attempt any modification of it, we plunge into a labyrinth of difficulty from which there is no way out but by retreating.”

FROM HERE

Joe Stoutenburg August 7, 2009 at 11:56 am

Very nice presentation to the Eureopean Parliament. I would be very curious to know if there were any indications of how it was received.

If you don’t mind the gloomy outlook, I am kind of cynical of attempts such as this to “speak truth to power”. Though it doesn’t hurt and is worthwhile to do, I wonder how much impact it really has.

This lecture supposes that it is the intention of political rulers to make decisions for the good of society broadly. History is replete with very public examples of when this has not been true. And it makes me suspect that it is privately not true generally. Most political rulers are attempting to benefit themselves and their principle supporters.

Government money may be disastrous for society as a whole, but it is beneficial to those who can control the institutions that manage it. Politicians need only keep the system from completely ruining society and convince voters that they are doing the right things.

greg August 7, 2009 at 1:18 pm

Yes, the Fed has expanded their balance sheet by creating money out of thin air, but they have spent that money on assets that provided certain institutions needed liquidity. Do you realize that just one of the companies that the invested in, Bank America, the Fed’s investment has grown 5X! Everyone of their other investments, except for AIG and Bear Stearns has had the same performance.

Why hasn’t the markets indicated future inflation? Because the markets are smart enough to realize what the Fed is doing.

Is what the Fed is doing right? I don’t know, history will tell. But if you are going to read the tea leaves, you really need to look into the whole cup.

Ohhh Henry August 7, 2009 at 1:41 pm

“Is what the Fed is doing right? I don’t know, history will tell.

I do know. What they are doing is wrong. Unless by “right” you mean, what is the best way to impoverish the masses and enrich a tiny elite.

Imagine a desert island on which Crusoe and Friday live. Crusoe picks coconuts, Friday catches fish. Every day they exchange 1 fish for 1 coconut and live comfortably.

If Crusoe works overtime for a month and picks twice as many coconuts as usual and sets aside the coconuts for future use then he can spend a month enlarging his hut or building a “vacation hut” on the other side of the island. The wealth and well-being of the islanders will not suffer during this time.

But if Crusoe instead of saving coconuts takes time off to build his hut and only gives Friday an IOU for “one coconut” written on a banana leaf but still collects a fish from Friday every day, then there is a problem. If Crusoe takes too long building his hut and gives too many banana leaves to Friday then Friday is going to start to doubt whether Crusoe can ever pay him back. The islanders’ well being suffers as long as Crusoe is not picking coconuts and spending all his time building and decorating a luxurious McHut.

The Austrian economist’s prescription is one of common sense. Crusoe must quit building his luxurious hut and get back to work. If he cannot pick enough coconuts to repay Friday then Friday must foreclose on Crusoe’s luxurious hut. The true wealth of the island is measured by fish and coconuts, not by the number of banana leaves in circulation and not by the size and luxuriousness of the huts the islanders own.

The Federal Reserve’s prescription is to print trillions more banana leaves to give to Crusoe, so that he can give them to Friday and keep on living in his luxurious hut and building and expanding it without picking coconuts. Friday is expected to keep on fishing forever and get nothing but banana leaves in return.

Please tell me, without waiting five years to see what happens, whose prescription is the “right” one for this economy.

Mike Sandifer August 7, 2009 at 3:37 pm

Where is the model and the evidence that fiat, unbacked currencies lead to bubbles? Yes, bad monetary policies can help fuel bubbles, but create them? Bubbles come naturally with markets, because almost everyone benefits from creating them. Executives get huge bonuses, stock and bondholders get capital appreciation, goods and services providers get more revenue and profits, consumers get more jobs, higher wages, and more credit, and politicians are more secure in their jobs when economies appear to be growing rapidly.

Of course, the gold standard is no solution, as politicians have always watered down or completely abandoned such schemes whenever it suited them.

“What is more, the artificially suppressed interest rate shifts scarce resources increasingly into the more time-consuming production processes for capital goods — at the expense of production processes for consumer goods. While the increase in the money supply initially stimulates economic activity, the ensuing boom is, rather tragically, economically unsustainable and must be followed by bust.”

Where is the evidence for these particular temporal shifts in capital investment due to artificially low interest rates?

Vanmind August 7, 2009 at 11:44 pm

“Second — and this aspect may not attract peoples’ attention right away — governments’ attempts to fight the correction will destroy what little is left of the free market order.”

In other words, those scheming for a one-world government will consider the collapse as “mission accomplished.”

Walt D. August 8, 2009 at 12:54 am

Ohhh Henry
and to paraphrase Peter Schiff, one day Crusoe gets sick and can’t eat Friday’s fish. Friday says, “oh my goodness, I’m unemployed! I hope Crusoe gets well soon so that I can go back to work!”

N. Joseph Potts August 8, 2009 at 12:07 pm

I WOULD love to know who (might have) heard this talk, and what sort of reception it got. I assume it was given before a small committee of members of Parliament, most of whom were either sleeping or using their cell phones, and that anyone who heard it (had to) rejected it.

Joe Stoutenburg August 10, 2009 at 9:34 am

N. Joseph Potts:

That was sort of what I was picturing too. Think about footage that is shown sometimes on CSPAN of testimony given before an empty room.

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