It was Friedrich von Hayek, the great Austrian economist, who explained
just how central the price system is to capitalism and our civilisation's
astonishing prosperity. The fact that goods, services, assets, money, time,
ideas, and risk all come with a price attached allows resources to be
allocated remarkably effectively. ...
The free market makes mistakes, of course, but it fails far less
frequently than any alternative way of allocating resources. The only other
way is to direct activity centrally -- an extreme version of central planning
-- but that is a recipe for catastrophe.
Tragically, while policymakers supposedly understand this, they have spent
years undermining the price system, making it less useful and efficient,
planting the seeds for one crisis after another. The current market turmoil
-- which has pushed the FTSE 100 down 22 percent from its recent peak, sent
yields into a spin, and turbocharged gold -- is one consequence of all of
this. Far from being a manifestation of what the left describes as
"neo-liberalism," it is primarily a failure of statism.
Not everything that is going wrong can be blamed on politicians or central
bankers, of course. The private sector can also make spontaneous errors. But
the US, UK, European, and Japanese economies would not be in the position
they are in today had the price system been allowed to clear freely and had
policymakers allowed more of the malinvestments of the past to be liquidated
more quickly.
Kicking the can down the road can help ease an adjustment, but it can also
allow denial to set in. Tragically, the latter is what appears to have
happened in many economies and markets around the world.
Ever since the Wall Street crash of 1987, central banks have relentlessly
disrupted the price system to smooth economic activity and placate financial
systems. ...
Instead of working freely, as it should, the market has become distorted
and corrupted, sending out misleading price signals and guaranteeing clusters
of errors from investors. A failed intervention begets another failed
intervention, and another, and another: This cycle has been ongoing for 25
years at least, triggering ever more extreme action.
None of this is novel: Ludwig von Mises, another Austrian economist,
described earlier versions of this phenomenon in the early 20th century. The
next step in some countries will be negative interest rates, followed by
helicopter money. Central banks need to ensure that there is enough money in
the economy. But they should follow simple rules to ensure that this happens,
not seek to micro-manage sentiment.
The price of equities should be determined by investors interacting
freely. Instead, the primary driver is now hints from the Federal Reserve.
This isn't right; it is bad for our long-run economic prosperity and very
dangerous politically. Other markets are equally mispriced. ...
... For the full commentary:
http://www.telegraph.co.uk/finance/economics/...risis-has-be...
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