Politicians Meddling in Markets Gets Messy
Economists fully expect governments to get hands on with markets, and indeed, some structure is useful. Property rights and rule of law help markets to function more efficiently. With basic order markets are good at discovering prices and getting investments, products, and services where they are needed most.
However, governments are subject to perversion… often by the politicians that stand to benefit the most. In a “let no crisis go to waste” era governments around the world have jumped into markets with abandon, and with no fear of ensuing consequences. These political decisions – affecting entire nations, but driven only by a handful of people – have injected massive distortions into the system.
From The New Yorker:
“Political risk is hard to manage because so much comes down to the personal choices of policymakers, whether prime ministers or heads of central banks. And those choices aren’t always going to be economically rational—witness Merkel’s recent tergiversations. Similarly, the U.S. government’s failure to bail out Lehman Brothers in 2008 seems to have been in part the result of Treasury Secretary Henry Paulson’s desire not to be seen as Mr. Bailout. Investors, then, are being forced to read the minds of policymakers—not something they’re good at. Markets work best when there’s lots of information available and a historical track record to go on; they excel at predicting things like horse races, election outcomes, and box-office results. But they’re bad at predicting things like who will be the next Supreme Court nominee, as that depends on the whim of the President.
“Also injecting uncertainty is the fact that, even when politicians do the right thing, timing is all. Take the TARP bailout plan. Congress rejected it the first time around, in the fall of 2008, and the Dow fell nearly eight hundred points in a day. TARP passed on a second attempt, but by then the damage was done: fear and risk aversion had spread, and the stock market tumbled fifteen per cent more in a week. The bill for the Greek bailout has ballooned as a result of similar delay. In March, people were talking about a commitment of twenty-two billion euros. By early May, the E.U. and the I.M.F. planned to come up with a hundred and ten billion euros. Now more countries need bailouts and the total cost is seven hundred and fifty billion. “
The New Yorker would seem to suggest that better-timed bailouts would have been useful. However, the problem is that Paulson, Congress, and the EU tried at all. It could be debated whether or not the rules initially established for the market were perfect. However, to change so many of those rules — just as the guilty actors were being punished for failing — stripped away any remaining credibility left in the structure. To boot, it was, of course, at taxpayer expense.
Worse still, as Greece has shown us, this increasing volatility is not only being influenced by the US government, but also by the governments of Europe and China. Now both have a greater ability and willingness to meddle in the market as well. The actions that have been sown by all three have yet to be fully reaped. We’ll have to wait and see exactly how the bailouts in these regions spark up a new and global round of currency debasement.
You can visit The New Yorker to read more about the age of political risk.