20 Feb 2009

Business Cycles

Some of you may be wondering why the government is so interested in "stimulating" the economy to keep growth positive.

Let me tell you -- it's NOT to make the economy stronger OR to protect workers.

It's to help companies and protect jobs.

The trouble with such policies is that they protect the status quo, which includes mispricing, misallocation of resources (capital, labor, materials) and mistaken notions of what works and does not work.

In other words, the "stimulus" impedes the natural ebb and flow of the business cycle and prevents the creative destruction that defines real capitalism.

From everything that I read and hear, I have come to three conclusions:
  1. The banking system is in crisis and DOES need to be rescued/nationalized
  2. Few people know what financial instruments are worth, and we will not get anywhere until those instruments are traded and marked to market.
  3. Everything else (stimulus, mortgage purchases, bailouts, etc.) are a waste of OUR money, excuse for corruption AND non-solution to our problems.
I say all these things as a micro-economist who understands incentives. I am no macro-economist, but I think that there are other, better ways to restore confidence and tame the animal spirits that are causing havoc in markets.

Oh -- and one more important thing: Many politicians are being told to "do something." Such a request -- combined with their natural tendency to command and control -- underpins the terrible ideas that are coming out of DC.

Bottom Line: It's time to have a little humility (we can't do anything), let the cycle run (we're gonna lose a lot of $$), and concentrate on protecting people (not jobs or businesses) until the market finds its feet again.