Tuesday, October 18, 2011

Where Fault Lies in the Recession or, Why We Will Never Get Justice

According to Austrian business cycle theory, artificially low interest rates create bad information which causes people to make bad decisions even as they are acting rationally given the information they have. We can see this in the housing bubble, and we can see it in the education bubble, with low-interest student loans driving it. Cheap money creates false signals. Distorted prices cause people to make what turn out to be bad decisions, made worse when the bubble bursts.

Now, if a business were to do this, were to misinform people about what they were getting, this would be considered fraud, and the business would be held responsible, not the victim of the fraud. However, we have people who were defrauded into buying houses and getting educations that have turned out not to have the value they thought they did, who bought houses and educations with cheap money, thinking they would have the value advertised, and who have seen that value disappear -- along with their jobs in many cases -- but who now are told that they "should have been responsible" and not gotten things they couldn't afford. But what if they could afford them at the time? Circumstances change. And, worse, they were able to afford something, at the time, that was said to have more value at the time than it turned out to have, while now they cannot afford this same thing that has decreased in value, but whose costs must still be paid. They have been defrauded -- but who is paying for it?

The Occupy Wall Street crowd think they have the answer: banks and Wall Street. However, these are but the secondary players, the secondary cause. They were acting rationally given their own bad information -- not to mention pressure from the primary players. It does no good to protest the secondary cause -- we have to protest the primary cause, the government and Federal Reserve which actively worked to create artificially low interest rates and have pushed for more higher education and more people in houses. To get what they wanted, the government created false price signals, including cheap money, to get the behaviors they wanted. Thus, they are responsible for this mess. And they should pay, and they should be the ones made to get us out of our bad situations -- again, something the OWS crowd have intuited to some degree, but without much economic understanding behind it.

The problem is of course that the government does not have its own money. It must tax or borrow (and tax in the future) to get the money needed to make things right. And of course everything they have done to date has done nothing more than maintain the status quo and continue to distort prices. Thus, in a financial sense, one cannot hold the government responsible for its idiotic behavior, because all we would be doing would be taking water from one end of the pool to pour it into the other end. Further, there is the problem of moral hazard, as people would begin to think that every so often the government will bail them out when they have made bad decisions (assuming everyone has made the same bad decisions, which only takes place when the government distorts prices). Of course, the banks are in such a moral hazard situation, knowing that the government will bail them out whenever there's a downturn. This makes it such that the banks are less interested in trying to overcome price misinformation, and are often willing partners in it.

Further, the government has screwed us over on being able to get out from under debt. Don't try to get out of either credit card or student loan debt, because it's not going to happen. Bankruptcy won't save you. And the government has made it harder and harder for the average person to declare bankruptcy, all to the benefits of the banks. This is something that has to change.

Those who have made what turned out to be bad decisions because they were lied to because of distorted prices (and, sometimes, directly), deserve justice. But the government, which is supposed to be where justice is meted out, is the culprit. Where, then, does one turn to justice?
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