The Austrian school, sub-prime, and speaking of centrally-planned economies…

Did you know, for example, that agricultural subsidies are set in five-year plans, here in the US? Those crazy commie Chinese. I mean. Wait…

Meanwhile, Hank “what is this thing called foreign exchange, anyway?” Paulson is pushing ever forward, along with his friends in the George “what is this thing called mature, responsible government, anyway?” Bush administration, with their five-year plan to fix interest rates.

George W. Bush is expected to announce on Thursday a five-year interest rate freeze on some subprime mortgages as part of a deal brokered by Hank Paulson, Treasury secretary, to prevent a tidal wave of home foreclosures.

The five-year freeze – a compromise between regulators, who were pushing for a seven-year freeze, and some lenders, who had argued for a one- or two-year freeze – was in a draft accord circulated on Wednesday, a Treasury official confirmed.

Under the plan, mortgage servicers would agree to the five-year rate freeze voluntarily. An industry lobbyist said the freeze would apply to subprime adjustable rate loans taken out between January 2005 and July 2007, with rates scheduled to step up between January 2008 and July 2010.

Although not directly related, I liked this passage, most of all:

Speaking at the Nasdaq stock exchange, Mrs Clinton said the financial sector had to accept its share of responsibility. “Wall Street shifted risk away from the people who knew what was going on and on to the people who didn’t,” she said. “Wall Street helped create the foreclosure crisis, and Wall Street needs to help solve it.’’

I agree – the moreso, had she mentioned her own culpability, being First Lady, and then Senator, for the period in which Greenspan loaded all these cannons with shit, aimed them at fans and then retired to write his goddamn book, I Can Be Pontius Pilate, And So Can You!

Here’s an interesting point of reference:

The Chinese government on Wednesday froze prices that it controls for the rest of the year, in the latest sign of Beijing’s mounting concern over inflation.

“All current rules on goods and service prices controlled by the government should be strictly implemented. Any unauthorized price rise is strictly forbidden,” the statement said.

The ministries ordered local governments not to raise prices without the approval of the National Development and Reform Commission, the main planning agency.

The statement urged local governments to raise minimum wages as soon as possible to make up for inflation, which jumped to 6.5 percent in the year to August.

That was mid-September – a little bit before that Secretary Paulson fellow went on his tour of lecturing other countries on how to govern and regulate financial markets.

This would be where the Austrian school (with whom I find I am ever-increasingly sympathetic) comes in. Specifically:

In a mixed economy, government decision makers can use information generated by markets, but as government grows relative to the market sector, market prices contain less information to guide resource allocation, rendering the economic system less efficient. Thus, smaller governments naturally act more efficiently than larger ones.

In addition, government institutions often contain incentives to make decisions that work against the public interest, and because government decision makers have no invisible hand to pull them toward socially desirable policies, the self-correcting aspects of market activity play no role in the public sector. As government grows, the ability of the price system to effectively convey information leading to efficient resource allocation breaks down.

… government intervention leads to more government intervention because all interventions have unintended consequences. A major source of the unintended consequences is the response of affected individuals who try to avoid suffering the negative consequences of the intervention. Thus, taxpayers who face higher taxes look for ways to avoid taxation, and individuals alter their behavior to avoid the negative effects of government regulation. Such responses create three sources of additional intervention.

First, the government might close loopholes to try to force people to behave as originally intended.

Second, because people try to avoid the adverse effects of interventions, an initial intervention will fall short of its goals, creating demands for more intervention to produce the desired effects.

Third, an intervention will produce unintended negative consequences that people may not even realize resulted from the intervention. When these negative side effects show up, demands will arise for more government intervention to remedy them. Because one government intervention creates demands for more intervention, the mixed economy moves increasingly toward government control.

Sing out when any of this becomes familiar. This is a trope to which I return, and ever will return, often: there is (as far as I’m concerned) no such thing as big government vs. small government; there is no substitute for good government. In this instance, only bad governments fix prices; only bad governments push five-year plans onto otherwise operable markets.

UPDATE: from a colleague:

I am naturally cautious of anything with the words

1. “five year plan”
2. “the master plan of”, or
3. “the final solution to”

in the title.


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