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Central Planning Can't Fix Herd Mentality |
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Monday, 31 March 2008 |
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Professional politicians, investors, and journalists are working in concert to push forward new legislation to greatly expand the powers and role of the Federal Reserve. "The markets have failed" they protest, and the solution they see is more central planning. The problem is, more central planning will only re-enforce the herd mentality that created the housing bubble and the current commodities spike.
The herd theory of the markets is important to understanding how the housing bubble became such a problem, but too often the herd mentality is written off as "irrational." In this article, the New York Times almost gets it: "As others make purchases at rising prices, more and more people will
conclude that these buyers’ information about the market outweighs
their own" The author concludes that: "This theory poses a major challenge to the “efficient markets” view of
the world, which assumes that investors are like independent minded
voters, relying only on their own information to make decisions. The efficient-markets view holds that the market is wiser than any
individual: in aggregate, the market will come to the correct decision.
But the theory is flawed because it does not recognize that people must
rely on the judgments of others."
So the solution? Well, according to the author, Bush, Congressional Democrats, and Ben Bernanke - the answer is to increase the Federal Reserve's oversight responsibilities and access to information. The increased data gathering would no doubt lead to more market intervention, specifically so-called "preventative" activities. What is unfortunately left out of the analysis is the Federal Reserve's role as shepherd to this troubled flock of sheep and how exactly America got to the economic condition it is in today. When the "free market" is looking for information on the economy these days, it is Federal Reserve policy that drives herd purchases and sales. If interest rates are going down, investors sell dollars and/or buy stocks. Recent rate cuts have triggered massive volume and significant, immediate price gains. When the sheperd leads, Wall Street follows. And when the Federal Reserve led the post 9-11 "Recovery," Main Street followed. We bought houses because "Interest rates [were] at historic lows!" We were reminded at least five times an hour on T.V., on the radio, online. What can you expect "the markets" to do when a rich centralized power changes the economic climate to achieve certain ends? "The markets" will follow the leader, even if it is right off of a cliff.
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Last Updated ( Monday, 31 March 2008 )
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