Thursday, May 27, 2010

The economy explained

Edmund Conway:
Politicians temporarily "solved" the sub-prime crisis of 2007 and 2008 by nationalising billions of pounds' worth of bank debt. While this helped reinject a little confidence into markets, the real upshot was merely to transfer that debt on to public-sector balance sheets.

This kind of card-shuffle trick has a long-established pedigree: after the dotcom bust, Alan Greenspan slashed US interest rates to (then) unprecedented lows, which helped dull the pain, but only at the cost of generating the housing bubble that fed sub-prime. It is not so different to the Ponzi scheme carried out by Bernard Madoff, except that unlike his hedge fund fraud, this one is being carried out in full public view.
This pretty much sums it up. In other words, every time the politicians (and Alan Greenspan) try to save the economy, they only make things worse and end up inflating another bubble, more ominous than the one which had just popped. The best advice, which they will never heed, is to just stop. Let the economy work out its kinks on its own. Politicians lack the insight to fix what is wrong, and simply end up sowing the seeds of the next crisis.

If they want to actually help they can start by reducing their influence in the economy through deregulation and eliminating loopholes and tax credits in the tax code which distort economic behavior. Then go sit on a beach somewhere, order a fruity drink with an umbrella in it, and stay as far away from the economy as possible.

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