Mohan...An article from this coming Monday's Sept. 21 edition of Investors Business Daily:
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E D I T O R I A L S Markets, Not Governments
Date: 9/21/98
The '94 Mexico bailout helped spread the financial flu in Asia. This spread to Russia and South America. Now, Mexico may get hit again. Governments and global lenders have tried all sorts of fixes. But they haven't worked. Only a free market can.
It's a wonderful myth: Capitalism run amok caused the Great Depression, and then government stepped in and fixed everything with ''reasonable'' regulations. A nice story, taught in classrooms across the country for decades. But it's false.
Government planning and manipulation of the money supply caused and prolonged the Depression. Capitalism had nothing to do with it.
It's the arrogance of government bureaucrats and economic planners who think they can ''plan'' and ''control'' markets. It doesn't work. It didn't work for Roosevelt and it won't work for the global FDRs of today.
The problems in Asia, Russia and South America should surprise no one. The Mexico bailout opened the floodgates. Every money manager with half a deck dumped billions into Asia and Russia. After all, if things went sour, the International Monetary Fund and World Bank would bail them out.
This ''moral hazard'' problem has shifted the risk to taxpayers.
Central and private banks also took the bait. They lent money like drunken sailors. Businesses ''invested'' in all sorts of things - things many people didn't want. This is called malinvestment. Then the bills came due.
Hence, the bailouts: $50 billion for Mexico; South Korea, $57 billion; Indonesia, $43 billion; Thailand, $18 billion; and Russia, $119 billion.
The cronyism and quasi-socialist economies in Asia and South America didn't help matters. And the kleptocracy that is Russia today, well . . . the mafia runs just about everything. And if the mob's not involved, corrupt officials are: the personnel flotsam of a centralized state.
Japan's in dutch because it lent too much to its spend-happy neighbors. It also loaned too much to its spend-happy old boy network, the keiretsu. Economic planners there keep trying to ''stimulate'' the economy. It's not working well.
While each of the floundering economies have different problems, the source of all their problems is simple: government interference.
There's more to this story, of course. But as government planners ponder the financial horizon, they should think long and hard and do nothing.
Let those people who made reckless loans take the hits. Don't bail out central and private bankers. If they can't manage money, they don't merit the job in the first place.
Cut taxes, tariffs, and regulations -across the board. This will free up capital and allow sober lenders to make prudent investments.
Leave things alone, and the market will fix itself.
Consider: Prior to the Depression, there were about nine business cycles in the U.S. Each downturn fixed itself within a year or two. Why? Because the government didn't interfere.
But in '24, the Fed expanded credit, which caused a boom. In early '29, the Fed sold bonds to tighten credit. And in October '29, the market crashed.
Then instead of letting the market fix itself as in the past, the government stepped in with distorting programs.
Smoot-Hawley tariffs killed imports, which killed exports, which led to bank failures and panic.
Public works projects, industry subsidies and deficit spending.
New taxes.
Gold seized and dollar devalued.
Farm subsidies.
Wagner Act and the minimum wage raised labor costs, fueled unemployment and prolonged the Depression.
There were 9 million unemployed in '41, the same as in '31. Roosevelt's New Deal solved nothing.
The economic problems of today will work themselves out. And yes, they will be painful for people who lose their jobs through downsizing and bankruptcies.
But governments that step in will only prolong the pain, as they've done in Japan, Russia and the rest.
The market is inexorably logical and ultimately beneficial, if allowed to work. Let it work.
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(C) Copyright 1998 Investors Business Daily, Inc.
Metadata: E/IBD E/SN1 E/EDIT |
