Regular readers know that I like to compare most efforts to regulate or socially engineer the free market to a balloon… you push on it in one place and something, usually unexpected, will happen some place else. A wild combination of efforts to make housing more affordable by discounting risk recently popped one big balloon, and the bailout is just creating another distortion we’ll have to deal with in a few years.
Or sooner. An article in Sunday’s Washington Post, yes the same Washington Post that seems to get it wrong on virtually every other issue, makes it appear that this rag of nonsensical nuance actually gets it for a change.
If there was one thing policymakers could agree on during the recent
economic turbulence, it was that interest rates on U.S. home mortgages
ought to come down, and fast. But as the government stepped in recently
to shore up the nation’s banks, those rates went up.
Chalk up another case of unintended consequences.
You’d think with such a casual flippant comeback that people would have understood this all along. But no.
Since the beginning of the crisis that has upended financial markets
and stunned the world economy, the well-intentioned actions of
governments and officials have often created new problems that require
nearly equally urgent solutions.
The complexity and linkages in the world financial system are to blame. "Every action the government takes has cascading effects on the
market, and they’re not always easy to predict," said Jim Vogel, an
analyst at FTN Financial.
"It’s like a chess game," said WIlliam Poole
who was president and chief executive of the Federal Reserve Bank of
St. Louis from 1998 to this March. "You might be able to anticipate the
next couple of moves. But after that, it gets very complicated, very
If it looks like a balloon it could pop like a balloon…
Virtually every emergency measure over the past few weeks has had
secondary and sometimes unpredicted effects, according to economists,
and this is one of the key dangers in the weeks ahead, as the
government issues more short-term loans to corporations, buys toxic
securities and invests in banks.
By fostering the belief the government will rush to the rescue whenever
a major financial institution begins to falter, federal officials may
be creating what many economists call a "moral hazard." That is, those
institutions may be more willing to undertake risky investments.
Or as we put it, a profound reduction of accountability.
"It’s all very Rube Goldberg-esque,"
said William O’Donnell, the head of U.S. interest rate strategy at UBS,
referring to the cartoonist famed for devices that work in indirect and
convoluted means. "You’re never quite sure what any one action will
And that should be the lesson for anyone enamored with big government. It didn’t work in the past, it didn’t work in the old Soviet Union, it won’t work in the future. Even China and the the northern European welfare states like Sweden are ratcheting back on big government programs. But it looks like we’re headed the other way.