Identifying Economic Cause and Effect

There is no silver bullet. The problem is like a broken bone. If a doctor is treating a broken bone, the right thing to do is to set the bone and immobilize it. The wrong thing to do would be to treat just the pain and send the patient home. But the patient might see the painkiller as a silver bullet solution even though it is not.

In 2008, we saw a lot of symptoms:

• Short investment positions (price speculation)
• Rising unemployment
• Lobbyists
• Illegal immigration
• Frozen credit

Since shorting, unemployment, lobbying, illegal immigration, frozen credit are all symptoms, dealing with them directly will not solve the problem. Focusing on these things is just like treating merely the pain related to a broken bone.

If a doctor sent his patient home with just pain meds, the problem would get much worse. If that happened, we would accuse that doctor of not knowing what he's doing.

Likewise, your government believes in only treating the symptoms because they don't know what they're doing.

Therefore:

• Banning speculative trades will make things worse.
• Busy work (aka artificially stimulating employment with time consuming but unproductive jobs) will make things worse.
• Getting rid of lobbyists will make things worse.
• Reducing illegal immigration will make things worse.
• Forcing banks to lend will make things worse.

Q: Why exactly would banning speculative trading make things worse?

A: The main problem is that speculation provides liquidity and inspires innovation. Take away speculation, you take away a large amount of liquidity. Speculators help markets find the bottom quickly. Allowing overpriced assets to liquidate as fast as possible speeds recovery.

Banning short selling is like banning the free market. You can't ban one without banning the other. An old story on Slashdot makes my point fairly well. If you ban short selling, you are also against the freedom Intel has in this example:

Intel recently announced that it was moving up the production of 32nm processors in place of many 45nm CPUs that have been on the company's roadmap for some time. Though spun as good news (and sure to be tough on AMD), the fact is that the current economy is forcing Intel's hand as they are unwilling to invest much more in 45nm technologies that will surely be outdated by the time the market cycles back up and consumers and businesses start buying PCs again. By focusing on 32nm products, like Westmere, the first CPU with integrated graphics, Intel is basically putting a $7 billion bet on a turnaround in the economy for 2010.

Source: Intel Moves Up 32nm Production, Cuts 45nm

You could say that Intel was shorting the 45nm CPUs. They were speculating future 32nm CPUs will be needed soon.

Ok, it's not exactly the same thing. But wasn't Intel free to make this decision? On the other hand, AMD might claim this is unfair and get the SEC to step in. This is an example of why the SEC should not micromanage free enterprise, especially when they're trying to correct from a previous cluster of errors. If the SEC would do this, maybe they wouldn't get distracted from their mandate to look for fraud.

Q: Why exactly would busy work make things worse?

A: Let me be clear. I'm talking about work like digging ditches then filling them in again or work for the sake of work instead of work for the sake of productivity. Getting a paycheck for mere physical exertion is a bad idea. It's just welfare for the physically fit. You may as well pay body builders for developing their muscles. What's the point in that? You're just throwing money down a rat-hole.

Lower unemployment is the effect of having a robust economy, not its cause. Going into debt in order to keep people busy is the exact opposite thing they should be doing.

Q: Why exactly would getting rid of lobbyists make things worse?

A: If you're against lobbying, just remember, the main thing is that lobbying is your 1st Amendment issue. As long as your Congress allocates money, people are going to want to influence congress. I don't see this as a problem, in and of itself because the real issue is that Congress has all this money that draws the lobbyists to a central location like ants at a picnic.

So lobbyists are an indicator of a problem, not the actual problem. If you're going to work within the system, you have to advocate lobbying.

Q: Why exactly would reducing illegal immigration make things worse?

A: I believe in free and open borders, but that's a topic for another article because I have really good reasons, believe me. But to answer your question, it just comes down to one word: scapegoat. Even if illegal immigration is bad, it's not the root cause of the problem. Since it's not the root cause, "fixing" it will make things worse.

Q: Why would forcing banks to lend make things worse?

A: This would lead to forms of "malinvestment." The dotcom bubble was a form of malinvestment. When that bubble burst, the Federal Reserve lowered interest rates to stimulate lending. I can see your eyes glazing over as I write this.

But all this really did was relax lending requirements. This contributed to that housing crisis thing. In order to force banks to lend, something has to be relaxed. If the banks find a way to lend without relaxing lending requirements, a bubble will form around that. This bubble will result in the next wave of malinvestment. And it will be (or already is) bigger than the previous bubbles.

Bite The Bullet

Since there's no silver bullet, how about a different bullet analogy?

Can you imagine breaking your arm, going to the doctor, and the schmuck hands you a bullet and sends you on your way? That's what government is doing. What do you do with the bullet? You bite it. That's not a solution for the problem. It's not even pain medication.

All of the above are results of "We The People" having lost their way. Any meaningful fix to address the above list will have to address the root cause.

Root Cause

The real problem is that "We The People" have allowed certain core factors to become undermined:

1. Property Rights
2. Rule of Law
3. Sound Money

For more information about the root cause, please consider this six-minute video from 2008:

Source: Center for Freedom and Prosperity Foundation

I just want to point out that the warnings in this video hold up pretty well. I don't personally advocate smaller government. But it would have been a good strategy.

While the reduction in economic freedom of the United States has been moderate relative to that of Venezuela, nonetheless the decline has been substantial. e United States’ high-water mark in economic freedom came in 2000 with a score of 8.65 and a rank of second place. The decline has been steady since and, in 2010, the United States fell out of the top 10. The recent economic performance of the United States has been sub-par and its recovery from the Great Recession has been the slowest since World War II.

Source: The Fraser Institute, 2016 (warning: PDF)