If public officials herd beach patrons into shark infested
waters, and start chumming, and then after the first shark
bite the patrons start to scream and flail about trying to
escape, thus causing more drownings than shark bite
hemorrhages-- we'd properly be more apt to label this
stupid or criminal, than call it "a panic" on the part of
the beach goers.
Our financial crisis has a lot in common with the above
shark feed. Although the results from the credit collapse
may seem insane, confusing, and scary-- they're really the
normal expected result of government directed money and
credit expansion.
Austrian Business Cycle Theory, which describes the reasons
for the inevitable downside to artificial expansion,
suggests that our benighted government's thrashing around
to try and thaw the "credit freeze" (and which seems like
the real panic, if there is one), is only treatment of a
symptom and can't succeed.
This is not just about people not trusting each other-- a
credit freeze, or a "liquidity trap", that makes stimulus
ineffective. This is about a growing realization that
there are not enough resources available to complete or use
all the unfinished and/or uneconomic projects out there
over a timeframe that would make them economic-- a
realization that projects and their owners must now fight
for their lives. Now, because of the over invested
position that credit expansion has put us in, and unlike a
"normal" economy, this is a zero sum game-- one project or
company's life may well mean another's death.
In other words, the "fear" and "distrust" in the markets
should probably instead be called logic. The Fed and the
Treasury can do whatever they please, pump in or not pump
in any amount of "liquidity", buy or not buy any assets,
whether trashy or public profit making, or both. Restoring
trust or liquidity is not the key issue, and is at any rate
impossible in this environment.
The credit collapse is about too much investment, and
investment in the wrong things (as Austrian Business Cycle
Theory calls it, "malinvestment"). Business has recognized
the malinvestment (finally), and it can't be unrecognized.
The Fed and the Treasury are frantically trying to throw in
more resources to fog investors up again, but as the
expression goes, they can only throw good money after bad,
to distribute and ultimately deepen and extend the pain.
To sum it up in short, brutish nastiness: there is no fix
other than time, depreciation, and failures.
It's not likely that President Bush will call a press
conference to talk about economic policy, and say, "My
fellow Americans, I'm announcing today that this is not an
aberration; in view of what we've done, this is normal.
Unfortunately, there's too much rationality in the markets.
Failures are an option." If he did, then after a brief
stunned pause while people decide if they're frightened
because they can't believe the statement, or because they
can, everyone would of course take the only logical course,
and scream and run in circles.
Whatever happens (with or without fantasy honest press
conferences), panic will get an irrationally large share of
blame. In the too convenient world of ever unevolving
politics, panic is an easy scapegoat. As in, "Obviously,
if it wasn't for that darn panic, the Feds would have had
everything under control the whole time, so let's just go
back to the way things were."
If that attitude gets as much traction as it's starting to
look like it might, then the subject of real monetary
reform and real banking reform will slip off the table in a
puff of snake oil (the way it always does). What a tragic
missed opportunity to add to the tragedy list.
----------------------------------------------------
Les Lafave
http://www.themaestrosrep.org
The true story of how the term "free market" became
history's greatest oxymoron (and some of the morons who
oxed it).
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