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- EverVigilant.net -
"The condition upon which God hath given liberty to man is eternal vigilance; which condition if he break, servitude is at once the consequence of his crime and the punishment of his guilt." - John Philpot Curran


How Do You Fix an Ailing Economy? More Government Control

What a government won't do to protect its debt-financed economy and keep its fiat currency afloat. From The New York Times:
    The Treasury Department will propose on Monday that Congress give the Federal Reserve broad authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.

    The proposal is part of a sweeping blueprint to overhaul the country's hodge-podge of regulatory agencies, which many specialists say failed to recognize rampant excesses in mortgage lending until after they triggered what is now the worst financial calamity in decades.

    According to a summary provided by the administration, the plan would consolidate what is now an alphabet soup of banking and securities regulators into a trio of overseers responsible for everything from banks and brokerage firms to hedge funds and private equity firms. ...

    ... Under the Treasury proposal, the Federal Reserve would become the government's "market stability regulator" and would be allowed to gather information from virtually any financial institution. Fed officials would be allowed to examine the practices and even the bookkeeping of brokerage firms, hedge funds, commodity-trading exchanges and any other institution that might pose a risk to the financial system.
Excuse me, but isn't the consolidation of control what created this mess in the first place?

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Blogger BadTux said...

No, privatization of parts of the fiat currency mechanism are what created the current mess. Large parts of the fiat currency mechanism were allowed to elude government control. Bear-Sterns was entirely unregulated -- *entirely* unregulated. The problem is that fiat currency, by definition, only "works" because it is tightly controlled by the government. When private businesses are allowed to create fiat currency by basically turning on the printing presses, which is what Bear-Sterns was fundamentally doing via issuing all these bogus "mortgage-backed securities", the whole scam collapses.

In short, you can either have a tightly government-controlled fiat currency with all parties capable of producing fiat currency tightly controlled by the government (and remember, any entitity which accepts deposits and issues loans is basically producing fiat currency due to the "multiplier effect", see Econ 101), or you can have the sort of alternating inflationary/deflationary spirals that typified the U.S. economy prior to the 1940's. Or you can abolish fiat currency altogether, but it's just so darned useful in a modern economy to have some sort of government-backed currency whose supply rises with economic production so that prices stay relatively stable or at least predictable. Without predictability it is difficult to make long-term investment plans. So fiat money, as much as folks like to carp about it, is here to stay. Given that, the necessity of putting all entitities capable of producing fiat money under tight government control is a necessity. Allowing just any ole' bloke to turn on the printing presses at will simply doesn't work!

- Badtux the Economics Penguin

4/2/08, 12:31 PM  

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