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Allister Heath: This crisis has been caused by arrogant central banks

Section: Daily Dispatches

By Allister Heath
The Telegraph, London
Thursday, February 11, 2016

It was Friedrich von Hayek, the great Austrian economist, who explained just how central the price system is to capitalism and our civilisation's astonishing prosperity. The fact that goods, services, assets, money, time, ideas, and risk all come with a price attached allows resources to be allocated remarkably effectively. ...

The free market makes mistakes, of course, but it fails far less frequently than any alternative way of allocating resources. The only other way is to direct activity centrally -- an extreme version of central planning -- but that is a recipe for catastrophe.

... Dispatch continues below ...


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Tragically, while policymakers supposedly understand this, they have spent years undermining the price system, making it less useful and efficient, planting the seeds for one crisis after another. The current market turmoil -- which has pushed the FTSE 100 down 22 percent from its recent peak, sent yields into a spin, and turbocharged gold -- is one consequence of all of this. Far from being a manifestation of what the left describes as "neo-liberalism," it is primarily a failure of statism.

Not everything that is going wrong can be blamed on politicians or central bankers, of course. The private sector can also make spontaneous errors. But the US, UK, European, and Japanese economies would not be in the position they are in today had the price system been allowed to clear freely and had policymakers allowed more of the malinvestments of the past to be liquidated more quickly.

Kicking the can down the road can help ease an adjustment, but it can also allow denial to set in. Tragically, the latter is what appears to have happened in many economies and markets around the world.

Ever since the Wall Street crash of 1987, central banks have relentlessly disrupted the price system to smooth economic activity and placate financial systems. ...

Instead of working freely, as it should, the market has become distorted and corrupted, sending out misleading price signals and guaranteeing clusters of errors from investors. A failed intervention begets another failed intervention, and another, and another: This cycle has been ongoing for 25 years at least, triggering ever more extreme action.

None of this is novel: Ludwig von Mises, another Austrian economist, described earlier versions of this phenomenon in the early 20th century. The next step in some countries will be negative interest rates, followed by helicopter money. Central banks need to ensure that there is enough money in the economy. But they should follow simple rules to ensure that this happens, not seek to micro-manage sentiment.

The price of equities should be determined by investors interacting freely. Instead, the primary driver is now hints from the Federal Reserve. This isn't right; it is bad for our long-run economic prosperity and very dangerous politically. Other markets are equally mispriced. ...

... For the full commentary:

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