Hayek further argued that the failure of central planning would be perceived by the public as an absence of sufficient power by the state to implement an otherwise good idea. Such a perception would lead the public to vote more power to the state, and would assist the rise to power of a “strong man” perceived to be capable of “getting the job done”.
We see another example of this now with the Treasury Department's proposal to make the Federal Reserve the chief regulatory authority on financial markets. So let's get this straight. The government is largely responsible for this credit collapse and the answer is that we need to give the government more power. The Federal Reserve bears most of the blame of any government agency and so we need to increase its responsibility. Mish does an excellent job making the case for this in his post The Fed and the Henhouse. Here's a taste from the post:
Let's Take a Look at "Timely"
Gee, that sure looks "timely" to me.
- Housing is imploding.
- There are $500 Trillion in derivatives that no one can possibly understand the financial risks on.
- A huge portion of those derivatives are with JP Morgan (JPM).
- Bear Stearns stock went from $170 to $10 in a year in Shotgun Wedding between Bear Stearns and JP Morgan arranged by the Fed
- Questions Linger Over Lehman's Balance Sheet as Lehman Brothers (LEH) is leveraged 31.7 times.
- Citigroup (C) had to be bailed out by Abu Dhabi Deal Raises Questions About Citigroup's Health
- Merrill Lynch needed $6.6 Billion Bailout From Kuwait, Mizuho.
- Cost of Capital "Ratchets Up" at Citigroup and Merrill
- Morgan Stanley (MS) sold 9.9% of the firm to China after handing out huge bonuses.
- People are walking away from homes
- Businesses Are Advised To Walk Away from agreed upon deals.
- There is an open public debate on Moral Obligations Of Walking Away
- 1 in 10 of the entire state of Ohio is on food stamps.
- Florida, Ohio, and Michigan are in an economic depression.
- There is No market for Asset Backed Commercial Paper (ABCP)
- German Banks Fears Global Meltdown caused by US subprime debt
- There is a $1.1 Trillion HELOC Problem
- Unemployment is poised to soar.
- Commercial real estate is massively overbuilt and poised to plunge.
- Goldman Sachs (GS) is calling for another $460 billion in writedowns.
- The SEC Openly Invites Corporations To Lie.
Who is to blame for the mess we are in?
And who is to blame? The Fed course, with help of Congress, and the SEC.
Congress passed legislation to create GSEs to foster affordable housing. Now the definition of "affordable" is over $700,000, and calls to reduce the role of the Fannie Mae are now calls to increase the role of Fannie Mae in the wake of the housing crisis. There were 300 some programs to create affordable housing and every program made the situation worse. All those programs really amounted to was handouts to the building industry and banks.
And if Congress would stop wasting money on needless programs the dollar would stop sinking. Of course the government is wasting trillions of dollars trying to be the world's policeman, a role we can no longer afford.
The SEC in its infinitely poor wisdom, decided to give government sponsorship to Moody's, Fitch, and the S&P and this led to extremely risky garbage being rated AAA. I talked about this problem in Time To Break Up The Credit Rating Cartel.
But the Fed deserves the brunt of the blame for micro-managing interest rates like some central planners from the Soviet Union. The Fed does not know how to set the correct price for money (interest rates) any more than it knows how to set the correct price for orange juice. Only free market forces can properly set prices so that economic distortions do not occur.
Unfortunately, every problem Greenspan faced was an excuse to cut interest rates. Even non-problems like the silly Y2K (year 2000) scare was an excuse to cut rates.
When the dotcom bubble collapsed, the Fed slashed interest rates to 1% to get the economy moving again. The housing bubble was the result. Greenspan added more fuel to the fire along the way by openly praising ARMs and derivatives.
Greenspan May 5th 2005: "Perhaps the clearest evidence of the perceived benefits that derivatives have provided is their continued spectacular growth."
I compared Greenspan to Buffett in Who's Holding The Bag?
Buffett in stark contrast to Greenspan called the explosive use of derivatives an "investment time bomb".
It's perfectly clear now who was right. For those who have not pieced the story together properly, it was fear of a dominoes style chain reaction collapse of Credit Default Swaps starting with Bear Stearns that caused Bernanke to force a shotgun wedding between Bear Stearns and JP Morgan.
So what does the Treasury Department propose? The Orwellian answer of course is to give the Fed still more power to wreak havoc.
I couldn't say it better myself.