Monday, March 30, 2009

There is a cycle in the history of money that has been repeating itself for thousands of years. This is its modern incarnation:
1) The money monopoly creates so much liquidity that the interest rates are pushed below market values.
2) This causes malinvestment on the one hand and a negative savings rate on the other.
3) Innovations happen in the credit market as usual, but the regulatory agencies are only preventing the kind of innovations that happened during the LAST boom, so this optimizes the credit market to the unnaturally low rates.
4) A credit crises ensues as firms discover that there is not the large supply of credit to finish their long-term capital endeavors that the interest rate led them to believe.
5) The stock market starts reflecting the re-evaluation of capital based on the actual state of the credit market.
6) The malinvestments are dealt with by laying off workers and other, even more heinous, ways.
7) People and their pundits generally blame whoever they were most jealous of during the boom.
8) Regulatory agencies are rewarded for their failures with more money and power and regulate to prevent the kind of credit market innovations that happened during this last boom period.


The thing to do would be to make a great table with quotes in each cell for each period of the last few panics/depressions/recessions. You could even include quotes from various people describing these eight steps, as this has been written about for hundreds of years. But it is true that there is only one thing we learn from history: that we learn nothing from history.

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