The Root of Today's Problem....

The socialization of risk and the expectation that the government is going to protect or is even able to protect our way of life is, in my humble opinion, the root of today's financial crisis. Governments cannot save an economy and people should never look to it to know how to handle these things. 70 years of the opiate of the reliance on government to know, regulate and solve economic problems will prove to be trouble.

The way that markets work, is to evaluate risk and government's willingness to step in and solve problems is included in this calculus. So, what eventually happens, is that markets will create risk to that point and continue if it appears profitable to do so. Its human nature. What eventually happens, is that when governments step in continuously, the risks will one-day grow to a point where even governments cannot solve the problem. An example of that is Social Security that will not be a problem that exists in 20 years since their will not be funds available to meet the promises already made.

I have always wondered if the government programs put in place during the New Deal of the 1930's are appropriate for today's world. Fannie Mae, that was a product of the New Deal, was a recent casualty of the crisis. Why is that? One of the reasons is that they never had to conform to the limits of the market but relied upon what we used to call an implicit guarantee. That guarantee is not a explicit in that there were no codified guarantees from the government for support other than an ability to draw $2.25 billion in caqpital, a silly small amount relative to the size of this organization. However, all market participants agreed that due to the size, scope and integration into the economy, that the government would never allow it to fail. The belief was right as the government did step in. This socialism has beget more socialism.

Furthermore, policies during the Great Depression debatably extended the Depression.

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

Also, large government interventions and fiddling raises risk for risk takers since they may not be able to allocate capital or think that there is a risk that government will seize gains made. Human nature is that people want to benefit for the deployment of their monetary and human capital. If they think that these gains will be arbitrarily seized then it is natural to not try.

Bad policy 75 years ago does not mean that we need to continue the mistakes. My fear, is that government and the people that stand to gain from governemnt intervention GOING FORWARD will influence a more interventionist policy. This is just bad news since we will be again facing this problem whose seeds come from bad central government policy.