Politics, Investor Sentiment, Market Risks

Goldilocks Government

By, 03/28/2008

Story highlights:

  • All sorts of "solutions" (i.e. government intervention and regulation) are being proposed to prevent future financial and economic troubles.
  • History shows aggressive government actions typically have unintended, often negative, consequences.
  • Economic troubles are usually identified in hindsight, and future problems are hard to foresee—making market-driven solutions far more preferable.

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The quest for perfection is a recurring literary theme, but as Goldilocks exemplified in the children's fairytale, the search may have unpleasant consequences. For centuries, governments have attempted to fine-tune their role in economic markets, and frequently, results aren't just "too little" or "too much"—they're fraught with unintended consequences. There's no "Goldilocks" government solution—there's just a wolf in Grandma's bed clothes—the only difference is how big his teeth are.

When economies and markets get rough, many naturally hope for a "greater power"—i.e., the government—to right things again. With a troubled Financials sector and shaky housing markets currently weighing on folks, all sorts of "solutions" (i.e., government intervention and regulation) are being proposed to "calm" markets, right current financial troubles, and even proactively prevent future ones.

More Government Bailouts May Be on Way
By Tom Raum, IBTimes.com
http://www.ibtimes.com/articles/20080327/more-government-bailouts-may-way.htm

Fed May Gain Influence From Crisis at SEC's Expense
By Craig Torres and Jesse Westbrook, Bloomberg
http://www.bloomberg.com/apps/news?pid=20601068&sid=arSZbp8CA_JE&refer=economy

Unfortunately, history shows aggressive government "solutions" during economic times frequently exacerbate economic problems or lead to new ones. For example, the Great Depression wasn't just a US phenomenon—it was a global depression. But Congress didn't help by signing into law the Smoot-Hawley Tariff Act to "protect" US exports, and thereby restricting international trade and causing retaliatory tariffs.

Now, beyond demanding a government "fix" to current woes, weary investors are demanding the government intervene to prevent unforeseen crises in the future!

Wanted: A New Policy for Bubbles
By Jon Hilsenrath, The Wall Street Journal
http://online.wsj.com/article/SB120649628730664463.html

The above article faults Alan Greenspan for opposing government attempts to prevent asset bubbles, and for suggesting instead, "all it could do was clean up the mess after the bubble had burst." We're not sure the government does such a good job cleaning up any messes, but we agree with Greesnspan that government shouldn't intervene. The article then argues, rather than waiting, it's better to calm a child before he smashes dishes in a temper tantrum.

But remember, Greenspan didn't "do nothing" as the article imples. In 1999, the Fed pumped money into the system in a proactive attempt to stave off a Y2K "crisis." When the crisis failed to materialize, the Fed cranked up rates to remove the surplus. Mr. Greenspan was a fine Fed head and did an excellent job overall (as central bankers gain cumulative experience, each should be better than the last)—but this proactive action did arguably exacerbate the tech bubble and the subsequent bear market. Staving off an allegedly impending crisis had unintended consequences elsewhere. Mind you, the recession was mild, but the bear market was fairly severe.

What makes proactive intervention proponents think this time they'll get it "just right? We think Fed action is fine and conducting monetary policy is a necessary function of modern markets. Recent Fed action has been innovative and appropriate (see "Don't Call It a Bailout," 03/25/2008 and "Whoa-oa, Domino?" 03/18/2008). But we wouldn't want to see the aggressive proactive intervention from our government or the Fed the article suggests—all to solve a shadowy future crisis we're not even sure will ever materialize or even have the impact we fear.

Fact of the matter is, economic troubles are usually identified in hindsight, and future problems are hard to foresee. There's no real way to finesse the "just right" solution ahead of time. Because of this, overreaching government intervention will pretty much always have unintended consequences—and it's not easy to predict what those consequences will be. In fact, miscalculated intervention and regulation can stifle growth, roil markets, and even put the economy into a tailspin. We've seen it before!

It's tough to have faith that, if left alone and given time, rough markets will eventually achieve long-term averages and economies will grow. Folks may think they want the intense beige of a perfectly regulated market, but it's just not possible. Those who are too impatient and want perfect porridge now may find themselves waking in a den of angry, hungry bears.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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