The following excerpt is from an article sent by a Minyan and written by Sean Corrigan on "How Recessions Become Depressions":
"The music of commerce (efficient companies growing at the expense of inefficient ones) would thus be harmonious and evenly paced, its dynamics restrained; there would be no swelling crescendo of the Boom, no cacophonous accelerando to the climax and no minor key diminuendo thereafter into the Bust. But, once the government takes over from the free market as musical director--and certainly after it appoints the central bank to conduct the orchestra--things are never quite so euphonious."
The article gets much darker from there, but the main point is contained in this seemingly innocuous statement: the government's attempt to smooth out business cycles on a macro scale actually does much harm to the natural capitalistic process. The natural forces that normally and efficiently work on a micro scale (like when the corner drug store is driven out of business by the lower cost wholesale-retailer) to eliminate unproductive businesses and reward productive businesses, that when left alone increase productivity over time, are thwarted.
In other words, when artificial forces intervene, the process gets messed up. For example, when any central bank injects too much liquidity, inefficient businesses are artificially kept alive too long. Efficient businesses are forced to drive down margins to unsustainable levels for at least a time to compete. The good companies don't earn as much as they should because the system's overall capital is inefficiently allocated. The result is invariably too much debt.
There is an issue being voted on in the state of Ohio. The governor's plan is to stimulate the economy there by floating a multi-billion dollar state bond issue (borrowed money) backed by the taxpayers of Ohio in order to invest in bio tech companies.
There is much irony to this disastrous plan. The government believes it is more qualified than the most sophisticated private markets in history to decide which companies should or shouldn't get seed capital (the private markets have obviously already passed on these companies). The government is also likely to favor the companies in their fold with "concessions" like government contracts. This will keep companies alive that quite frankly don't deserve to be, at the expense of companies that do. This is not a novel plan (Governor Taft is no visionary); many other states are doing the same thing.
As I have stated before, especially given the ideological state of affairs, government intervention can affect markets for some time. But historically it is a fact that the larger the intervention, the more acute the correction is when it eventually comes and the more it leaves the system saddled with debt.
I used to be a conservative. I believe that I still am. But if our current government, at both the state and national level, is deemed to be conservative, I must be deemed libertarian.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter