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Why You're Forced to Take Risk


...the government is forcing investors to take more risk by competing with the private market in price.


After hearing Mr. Bernanke describe the current account deficit as being the result of Americans "investing more than they save," I don't have much to say as to the new chairman's abilities. I will leave it to the TV pundits to laud with praise.

I will say that his ability to obfuscate is nowhere near Mr. Greenspan's. Perhaps that is the greatest weakness I see in a man who must "influence" markets. Man, has it really come down to that?

The most interesting questioning was from a few Senators who challenged his notion of "foreign over savings" as the source of our liquidity by informing the Chairman of the fact that it is central bank purchases (not private investors buying them because they perceive value) of our bonds that is the source of the liquidity. In other words, central banks are printing their currency as fast as we are.

Governments are major purchasers of world assets with printed currency. And now they are delving into more risky assets like mortgages and who knows, even stocks. They are doing this because their normal meddlings are not having enough effect. The gross is not gross enough.

When central banks buy government securities they only indirectly affect investor asset allocation decisions: it makes credit available so that if the market wants to take risk it can. The market still does not have to take that credit if the market deems the risk too high.

When central banks buy risky assets, they more directly affect investor allocation decisions because they drive the prices of these assets higher. If investors want those assets, they have to pay an even higher price. So the government is forcing investors to take more risk by competing with the private market in price.

This is what I mean by the socialization of markets: governments controlling asset allocation decisions with printed money. For several centuries world economies have grown because the private market through capitalism has efficiently made these decisions.

Every instance where the government makes these decisions (the Soviet Union) for the people, the economy fails.

Enough said?

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