Friday, October 16, 2009

Norberg on the Failure to Learn from the Crisis

In this excellent article, Cato Institute's Johan Norberg explains how the crises, instead of teaching important lessons to most people, reinforced their misguided beliefs (HT Selva Brasilis). Here are some interesting passages:

In the big picture, the great financial meltdown of 2008 can be blamed on the collapse if a series of bubbles -- bubbles in credit, in housing, in asset-backed securities. In the aftermath, we face a new threat -- a knee-jerk bubble in regulation and government intervention in financial markets. You've been warned. ...

All the salvage operations and bailouts that have been implemented this time will make the problem seven times worse next time, completely regardless of the effect that they may have in the short term to prevent free fall. Banks and companies have learned that the more they do things just like everybody else -- like the rest of the herd -- the more likely they are to be saved by the government if things go wrong. Because then their operations or their market will be too big to be allowed to fail. Those who think differently and do things their own way -- and thus pose no threat of systemic crisis -- cannot hope for any help. A prudent banker is one who is exactly as imprudent as the other bankers, so that he goes bankrupt when others do, as the early 20th-century interventionist economist John Maynard Keynes is claimed to have said. If we really want to make future financial storms less severe, we should be doing the opposite of what is happening now. We should remove the safeguards and untie the safety nets. We should abolish bailout plans and deposit insurance, so that
banks would be forced to think about what risks they can really bear and how much capital they need to cover those risks. We should deprive the credit-rating agencies of their official role, so that investors would have to think for themselves about where to put their money. We should systematically put an end to the protections and guarantees that government authorities give to investors and savers, to leave room for their own common sense and their own responsibility. Those who do not trust themselves should not go anywhere near the riskiest markets.

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