Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Let the Bankrupt Banks Fail

Politics / Credit Crisis Bailouts Nov 10, 2008 - 04:06 PM GMT

By: Ayn_Rand

Politics Best Financial Markets Analysis ArticleEverywhere today politicians are blaring that they must save America's financial institutions, alleging catastrophic risk to the economy were any to fail. Paulson and the entire Bush administration, in a discernible panic, are now pouring $700 billion into the big banks, having already bailed out AIG, Fannie Mae, Freddie Mac, and Bear Stearns to the tune of $300 billion.


Capitalism doesn't work, they declare, but fortunately the government is here to rescue us.

Sadly, they have it all backwards. The credit crisis is just more evidence that whenever the government supplants the free market and attempts to “manage,” i.e., control, the economy--disaster ensues.

Overlooked here is that in a free market business failures are not just normal, they're crucial for the best products and ideas to emerge. Most restaurants fail in their first three years because customers have other preferences. Many mom-and-pop grocers go out of business because Walmart offers better selection and lower prices. Even whole industries--think typewriters, 8-tracks and horses and buggies--vanish because new inventions and competitors arise.

None of these failures are a problem, nor do they threaten the system. On the contrary, they are an inherent part of the progress which only capitalism makes possible.

So why would failures in the financial industry be any different?

Typically, the answer given is also the one used to rationalize the creation of the Federal Reserve, the FDIC, the FSLIC and any number of other government agencies and regulations intended to “manage” the banking system: financial firms carry systemic risks for the nation's economy and therefore can't be allowed to fail. As evidence, bank failures from 1870 to 1913 (pre-Fed) are cited, followed by the assertion that their number was simply “unacceptable.”

But every business forms part of the economic system and thus has “systemic” impact. If Microsoft were to fail, thousands of suppliers, customers, and workers would be affected, as would their customers, suppliers, workers, etc. Yet this would be no reason to bail them out. We know that new businesses would arise to fill the void, better for having learned from Microsoft's mistakes.

And as a historical fact, the U.S. economy during the period 1870-1913 grew significantly faster than it did after the Fed was established. True, there were many bank failures in this period, but there were also many business failures in general: banks were actually less likely to fail than were other businesses. The number of bank failures speaks to the dynamism of the period, not to anything fragile in the financial system. Precisely because market mechanisms were permitted to work, depositors, creditors and counterparties all kept a close eye on banks, monitoring leverage and withdrawing funds at the first sign of problems.

When the free market functions--and failure is allowed--people become viscerally aware of risk, with the result that they voluntarily assume less of it.

Conversely, when the government tries to “manage” the economy--when the consequences of risky behavior are shifted from self-interested actors to taxpayers, as was done by the creation of the Fed and its various insurance programs, or when weak financial firms are propped up rather than being allowed to fail--people take on risks they would not otherwise. Banks are less careful, depositors no longer evaluate their institutions, and risks are concealed and amplified until they become catastrophic.

So pre-Fed we had runs on banks, some undoubtedly severe--but with the Fed we've had the Great Depression, the S&L meltdown and now perhaps the greatest worldwide credit crisis ever.

An analogy may be helpful here. Historically certain types of forests naturally experienced frequent, but small, wildfires. Because their frequency kept deadwood at a minimum, the fires never grew into large conflagrations. However, when government forestry services instituted fire suppression policies, they eliminated most small fires, but caused deadwood and other fuel to accumulate. When at last a fire came that could not be suppressed, it grew into a devastating inferno.

Learning from their errors, forestry services have abandoned fire suppression policies.

It's time for our government to do likewise. First, by immediately abandoning its bailout binge, and then by phasing out all of the economic controls by which it attempts to “manage” the financial system--from the FDIC to the Federal Reserve itself. Nothing less can reestablish the freedom essential for a sound and vibrant economy.

By Amit Ghate

www.aynrand.org

Amit Ghate is a guest writer for the Ayn Rand Center for Individual Rights. The Ayn Rand Center is a division of the Ayn Rand Institute and promotes the philosophy of Ayn Rand, author of “Atlas Shrugged” and “The Fountainhead.”

Copyright © 2008 Ayn Rand® Center for Individual Rights. All rights reserved.

Ayn Rand Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in