Wretchard wrote:
One of problems economists should study is what happens when the overall truth content of a servitized economy declines. Whereas the “truth” of a ton of steel is the steel itself, what is the truth of a bundled subprime mortgage? What is the truth content of a credit default swap? Perhaps we don’t know, and this circumstance has directly led to the current economic crisis. The financial meltdown is from a certain point of view, a pure crisis of information. What we don’t know (or better yet what we do know but ain’t so) is hurting us. The market has either temporarily lost its ability to properly value assets; or more disturbingly we are simply unwilling, like the ATP vis a vis Andre Agassi, to value the assets because to recognize the truth would be catastrophic for business in our servitized world.
I would put it differently. Markets generally tell the truth and therefore are inconvenient for people whose success depends on lies. What the financial meltdown really represents is a discounting of new information, i.e., the markets adjust as it becomes clear that the “facts” everyone counted on are false. The new market consensus about the values of various financial instruments and physical goods is not pleasant, but who can deny that it’s a more accurate representation of reality than the old consensus was. This is progress. What’s difficult is to use the information in productive ways. The natural tendency of humans is to blame the messenger rather than make the necessary hard choices.
Perhaps the real psychological purpose of the various government stimulus packages is simply to suggest that we don’t need to know the truth. It’s government’s way of saying that when we don’t like market signals then bureaucracies can set it aside; that with enough printed money we can avoid looking at ourselves in the economic mirror and forestall bankruptcies indefinitely. The music can be kept playing forever if only we wish for it hard enough.
Governments are always trying to rig markets to generate false information that supports the agendas of the people in power. They are still doing it. In the long run it never works. The only questions are how long the charade can be maintained and how large a bill we will have to pay when the reckoning comes. The current financial crisis is, obviously, tremendously expensive. However, governments, by engaging in massive bailouts and currency inflation rather than accepting needed institutional failures, are setting the stage for an even worse financial breakdown in the future.
