The attached piece by Rochdale Research is timely. I was going to write a piece on the Law of Unintended Consequences and Richard Bove writes an excellent article on the topic’s application to the ’stress tests’ for banks.
Bove’s article highlights the dangers of the Government becoming involved in business decisions - from Chrysler to ’stress’ - the risk of unintended consequences is enormous. Think of the ‘Greenspan Put’: for years, academia (Austrian economists and a few others aside) told us that business cycles problem had been solved - that it was now a thing of the past. In the process, the FED and US Government created an environment where ‘bubbles’ and financial ’skulduggery’ flourish. Not only that, if you read the books on sub-prime, some members of Congress and the Senate were pressing for their constituents to be given loans they could ill-afford.
So here’s the law in operation: the FED wanted to avoid a recession and the ill-effects of a bursting bubble - the consequences of inflating the money supply; the banks wanted to help those who traditionally were unable to afford housing; the politicians wanted to keep their constituents happy - all worthwhile sentiments. But the Law of UnIntended Consequences came into play and today we have the consequences we least desired.
Some may take issue with my statement that the banks wanted to provide assistance - that in fact all they wanted to do was improve their bottom line. Of course they wanted to improve their bottom line! We all do. But having said that, to deny that at least some saw themselves as doing a public service would be myopic. Adam Michaelson’s “The Foreclosure of America” is a fascinating glimpse into this thinking.
Obama’s team is on the same route. I accept that he has a genuine desire to alleviate the suffering and improve conditions. But in my view each step he is taking only mortgages the future of the US and unfortunately, at least for now, this means the rest of us.
Refer this blog post to a friend or colleague…
