Intervention & Politics

Analysis: The trust of a rogue | Reuters.

Successful politics revolves around two tasks. The successful politician must take the credit for positive developments and shift the blame for negative events. Germany is no different from any other country in this regard.

This quote embodies what Merkel is trying to achieve:

The main task for politics today is to bring the spirit of the social market economy into the financial markets so that international financial crises don’t repeatedly ruin what people have built up with their own hands and hard work.

Bringing the spirit of the social market economy into the financial markets means attempting the control these markets through central planning. This precisely what is occurring today through the central bank control of the money supply.

What people do not understand is that this very control is what makes the markets volatile and prone to crises in the first place. For example, the Federal Reserve has kept interest rates at near zero for about four years. This action has raised the price of all debt in existence creating today’s bond bubble and other market distortions including commodity price inflation.

Government intervention is what causes these problems, not free markets. When there is a market crash, we should allow it to play out. Eventually, the market will clear, and asset prices will stabilize. By intervening, the government merely prolongs the agony.

If you ever believe that journalists are neutral, read this passage referring to Merkel’s statements:

Noble sentiments for sure and hardly controversial. Five years of seemingly endless credit turmoil, bank collapses and market herding have hobbled the world economy and clearly expose the folly of free market excesses.

The author is aware of the problems of the GFC, but attributes them to free market excesses. Clearly, the author believes in government intervention. The issue here is that the free markets are not what caused the GFC; it was years of low interest rates from the Greenspan-led Fed that caused a succession of bubbles. Just like ancient bloodletting, the cure is really the disease.

Germans do distrust free markets. Look at their history. To a German, the free markets imposed on the country following WWI helped cause the hyperinflation that led to the rise of Hitler; however, it was the Reichsbank that printed money in virtually unlimited quantities that caused the hyperinflation. The Reichsbank was part of the government. It was intervening in order to keep the government afloat, because it would not make the budget cuts necessary to remain solvent.

The market is the democracy of money. Investors vote their dollars, euros, or quatloos by purchasing and selling securities. Every bit of power that a citizen holds by virtue of the vote and the freedom to spend his money on whatever he wishes is jealously desired by the politician. By attempting to control these money votes, the politician is attempting to increase his own power at the expense of the people.

Spain, Italy and Greece could drastically cut their budgets, but then the politicians would be ceding control of that money and unable to spread it around to ensure their reelection. So they try to hold on to this power by attempting to control the market instead. What they are doing is dictating a price for their government debt that will allow them to continue doling out favors to remain in power.

Government intervention is oppression, and the people will support this oppression as long as they get their cut. It is dawning on Europeans that they are getting shafted. They continue to pay high taxes but are slowly but surely losing the benefits to which they are entitled for these tax payments. The realization that the social contract has been broken will result in countries refusing to pay their debts. The political will to keep the status quo going will evaportate when the people realize that they have been cut out of the bargain.






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