A Credit Collapse, Not a Financial Panic

If public officials herd beach patrons into shark infested waters, and start chumming, and then after the first shark bite the patrons start to scream and flail about trying to escape, thus causing more drownings than shark bite hemorrhages– we’d properly be more apt to label this stupid or criminal, than call it “a panic” on the part of the beach goers.

Our financial crisis has a lot in common with the above shark feed.  Although the results from the credit collapse may seem insane, confusing, and scary– they’re really the normal expected result of government directed money and credit expansion.

Austrian Business Cycle Theory, which describes the reasons for the inevitable downside to artificial expansion, suggests that our benighted government’s thrashing around to try and thaw the “credit freeze” (and which seems like the real panic, if there is one), is only treatment of a symptom and can’t succeed.

This is not just about people not trusting each other– a credit freeze, or a “liquidity trap”, that makes stimulus ineffective.  This is about a growing realization that there are not enough resources available to complete or use all the unfinished and/or uneconomic projects out there over a timeframe that would make them economic– a realization that projects and their owners must now fight for their lives. Now, because of the over invested position that credit expansion has put us in, and unlike a “normal” economy, this is a zero sum game– one project or company’s life may well mean another’s death.

In other words, the “fear” and “distrust” in the markets should probably instead be called logic.  The Fed and the Treasury can do whatever they please, pump in or not pump in any amount of “liquidity”, buy or not buy any assets, whether trashy or public profit making, or both.  Restoring trust or liquidity is not the key issue, and is at any rate impossible in this environment.

The credit collapse is about too much investment, and investment in the wrong things (as Austrian Business Cycle Theory calls it, “malinvestment”).  Business has recognized the malinvestment (finally), and it can’t be unrecognized.  The Fed and the Treasury are frantically trying to throw in more resources to fog investors up again, but as the expression goes, they can only throw good money after bad, to distribute and ultimately deepen and extend the pain.

To sum it up in short, brutish nastiness: there is no fix other than time, depreciation, and failures.

It’s not likely that President Bush will call a press conference to talk about economic policy, and say, “My fellow Americans, I’m announcing today that this is not an aberration; in view of what we’ve done, this is normal.  Unfortunately, there’s too much rationality in the markets. Failures are an option.”  If he did, then after a brief stunned pause while people decide if they’re frightened because they can’t believe the statement, or because they can, everyone would of course take the only logical course, and scream and run in circles.

Whatever happens (with or without fantasy honest press conferences), panic will get an irrationally large share of blame.  In the too convenient world of ever unevolving politics, panic is an easy scapegoat.  As in, “Obviously, if it wasn’t for that darn panic, the Feds would have had everything under control the whole time, so let’s just go back to the way things were.”

If that attitude gets as much traction as it’s starting to look like it might, then the subject of real monetary reform and real banking reform will slip off the table in a puff of snake oil (the way it always does).  What a tragic missed opportunity to add to the tragedy list.

By Les Lafave

Banking Reform – themaestrosrep.org

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