After a stretch of time when you could find one or two commentaries every week on such topics as sound money, Austrian Economics, or just some good’ ol bashing of the Federal Reserve, the op-ed pages of the Wall Street Journal have been relatively devoid of this fare more recently, or so it seems. Gerald P. O’Driscoll of the Cato Institute begins to make up for that shortfall in this piece from today’s paper.
Free markets depend on truth telling. Prices must reflect the valuations of consumers; interest rates must be reliable guides for allocating capital across time; and a firm’s accounts must reflect the true value of the business. Rather than truth telling, we are becoming an economy of liars. The cause is straightforward: crony capitalism.
In the U.S today, we are moving away from reliance on honest pricing. The federal government controls 90% of housing finance. Policies to encourage home ownership remain on the books, and more have been added. Fed policies of low interest rates result in capital being misallocated across time. Low interest rates particularly impact housing because a home is a pre-eminent long-lived asset whose value is enhanced by low interest rates.
Distorted prices and interest rates no longer serve as accurate indicators of the relative importance of goods. Crony capitalism ensures the special access of protected firms and industries to capital. Businesses that stumble in the process of doing what is politically favored are bailed out, leading to moral hazard and more bailouts. And those losing money may be enabled to hide it by accounting chicanery.
If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets. That means the end to price-distorting subsidies, which include artificially low interest rates. No one admits to preferring crony capitalism, but an expansive regulatory state undergirds it in practice.
Piling on more rules and statutes will not produce something different than it has in the past. Reliance on affirmative principles of truth-telling in accounting statements and a duty of care would be preferable. Deregulation is not some kind of libertarian mantra but an absolute necessity if we are to exit crony capitalism.
This is where I normally get lost with Libertarian arguments for even less regulation than we currently have, but, as I understand it, those calls normally assume a return to sound money and the end of the Fed as we know it which, when you think about it, makes a good deal of sense – restrict the expansion of money and credit and, with only a few exceptions, let people and businesses do what they want, letting the market sort it all out.