Nullius in Verba

Does Government Intervention Work?

Now that the election is over in both Canada and the United States we are facing one of the worst recessions since the Savings and Loan Crisis (S&L) in the late 1980’s and early 1990’s. It is interesting to note that the S&L Crisis was compounded by government intervention, in particular the government bail-out. It is ironic that such and event of a greater magnitude and yet almost identical in forensics could happen again. But it did, and all the same players are involved now as were then including the government structures, Fannie Mae and Mac.

In economics there is a term called moral hazard, an old term which dates likely almost to antiquity but was ressurected through some sort of quasi-convergent natural selection during the Rennaisance’s developing monetary systems. Moral hazard is when someone takes a different action than he normally would because he is shielded from the consequences. The best example of this is probably familiar to any of us who have had one or two friends whose parents were extremely wealthy, these friends would often trash their stuff or cars because they knew their parents would buy them new stuff - they were immune to the consequences of their risk. This is why insurance policies always have a deductible, (known as co-insurance).

As described in a 2006 Federal Reserve Bank Review:

When the interest rate yield curve rose dramatically beginning in the mid-1960s and became inverted (long-term rates exceeded short-term rates) several times for significant periods of time through the early 1980s, the economic value of most S&L institutions vanished. The federal deposit-insurance fund for savings institutions was bankrupted because of the pervasive assetliability duration mismatch that had existed among covered institutions. Subsequent attempts by the federal government to cover up or wait out the problems failed. The resulting taxpayer bailout ended up being even larger than it would have been if the initial devastating impacts of interest rate movements on the asset-liability mismatch had been recognized promptly, because moralhazard and adverse-selection incentives compounded the system’s losses.

Sometimes cutting off the festering limb is better than letting it cause a sepsis that will destroy the entire body.

So what I am going to do over the next little while is examine the trend that the Canadian government, a centrist “Conservative” verses the U.S. government under Barack Obama, a likely left leaning government (though possibly right leaning) is taking. While it appeared that earlier Stephen Harper appeared to be against deficit spending and subsidization, it seems that he is suddenly pulled politcally towards it, Ontario gave Harper its mandate, and you can bet that the manufacturing sector here wants what it always wants: monopoly, protection, and subsidization. Obama on the other hand, is probably not going to be able to subsidize as much as he would like due to both the potential bankruptcy of the U.S. as well as the underlying free market attitude of a large number of Americans.

To start today we will examine an interesting collection of interviews with Peter Schiff put together by someone on YouTube. Schiff is an Austrian Economist* as well as an advisor to Ron Paul, the person I supported as the Presidential candidate for the Republican Party. (I always get flack from conservatives for supporting Paul, especially since a large number of hippies, who when not numb, find his libertarian approach to drugs appealing.)**

What is interesting is how Schiff keeps predicting the fall of the finance and housing market due to the poor quality of the loans as well as a high rate of credit and consumption verses production. It is even more amusing watching the other talking heads laugh at him and his dour predictions regarding this bubble.

Wonder who is laughing now.

Next I will examine the economic evidence regarding government intervention into the Great Depression. What they tried back then and how it failed unintentionally causing the recession to last longer. Perhaps there will be some parallels to our own time.

In 1901 Medicine was Based in Both Scientific and Superstitious Theory. Today We Ask Physicians to Practice with Fact, Do We Ask Politicians?

* I think Austrian Economics has something to offer to Economics because it questions accepted beliefs and theories with logic. Unfortunately it doesn’t usually use data and mathematics to support its points and thus has difficulty becoming mainstream and relevant to people like myself.

** I believe a large number of Republicans are actively seeking a person with strong libertarian beliefs like Ron Paul to lead the Republican Party. I think eventually the same thing that happened to the Conservative Party in Canada will happen to the Republican Party in the United States. The Reform/Alliance Party flirted for a brief time with Social Conservatism under Stockwell Day as leader. The consequences almost tore the party to shreds, and almost reduced the party to a fringe party amonst the Canadian electorate as most people in Canada have more libertarian social beliefs. Harper was voted for as leader, including my vote, as he was seen as a moderate in the social area and more of a champion of economic freedom and political reform. The party has been very strong and very relevant under him. Whatever happens in the US is always bigger and more convoluted, but there are a large number of people grumbling about where the old Grand Old Party went, when it used to stand for economic freedom, minimal government, and it’s previously excellent track record on human rights.