When good decisions are no longer possible, bad decisions are inevitable.
If we had to summarize the response of the Federal government and the Federal Reserve to the structural financial crisis of 2008-2009, we could say that both institutions went all-in to obscure the real price of credit and capital.
The real cost of credit and capital is discovered by open, transparent markets. When a central bank sets the price of credit, it destroys the market’s price-discovery process. When the government subsidizes certain types of credit, for example, home mortgages and “cash for clunkers” auto loans, it destroys the market’s price-discovery process.
This distorts not just the price of credit, but the price of everything purchased with credit. This is the origin of bubbles, and of the resulting busts.
The state and central bank manipulate the price of money (credit and capital) to incentivize decisions that the state and bank want people to make. The state and central bank want people to consume more to prop up a dysfunctional economy, and since most people don’t have the cash to consumer more, the state and Federal Reserve want people to go further into debt, as this is the only way people can buy more stuff.
These institutions are terrified of recession (translation: a reason for people to vote out the ruling party of bought-and-paid-for toadies) and the creative destruction of unfettered capitalism, which eventually wipes out leveraged speculation and all those who indulge in such risky gambles–for example, all the banker and financier cronies that the Fed protects.
When the real price of anything is subsidized, manipulated or obscured, people lack the information needed to make good decisions. Lacking the information of the real price, they can only make bad decisions. There is no way to make good decisions when the information is incomplete or misleading.
When a commodity–for example, water–is collected and piped at great expense to farms and cities and then given to consumers at a subsidized price well below the actual systemic costs of collection, purification and delivery, then the water is squandered, for it is priced as if it were forever free and abundant.
