Can Government Bureaucrats do a Better Job of Allocating Capital than Free Markets?

This just in…Ben Bernanke and Tim Geithner have rushed to Los Angeles. If they can revive an entire world economy…why not the ‘King of Pop?’

Fans are hopeful…but here at Markets and Money we take a discouraging view of these revival efforts. We admire the achievements of science and technology; as for the works of economists and central bankers, well…we’ll wait to see how things turn out.

Yesterday, we took up the biggest illusion of the Bubble Era. We held it up to the light…and noticed:

So deeply rooted is this illusion that it will take more than a strong wind to uproot it.

We’re talking about the idea that government bureaucrats can do a better job of allocating capital than free markets. Everyone seems to believe it. They’re allowing a handful of economists – who failed the critical test; not one of them noticed the market tsunami coming last autumn – to direct the flow of trillions worth of savings. They’ve already put at risk more than $12 trillion. Right now, they’re denying the need for more ‘stimulus,’ but that is likely to change.

$12 trillion is a lot of money. Adjusted for inflation, it is still more than twice as much as America spent in all of WWII. But it’s not just the money…it’s the future of the world economy that is at stake.

In a nutshell, the meddlers believe they can borrow their way out of debt. If you say that the key problem in America is debt, they won’t argue with you. But they think that they can overcome that problem by borrowing trillions more.

Many times have we argued that they will fail. We laugh at building dog walks …bailing out businesses that have lost their way…and paying huge bonuses to Wall Street execs. But those are just the obvious flaws. Down deeper, in the dark, corroded heart of the government economist is a fatal conceit.

We know from the experience of the 20th century that Friedrich Hayek was right. He called it the “Fatal Conceit”: the idea that central planners working for the government are free from sin and error. He wrote early in the century…when National Socialism and Communism were still popular.

Now we know; central economic planning doesn’t work. Everywhere it was tried it was a disaster. The more the bureaucrats planned, the bigger the mess they made. But now we are supposed to believe that central financial planning will save the world from the mistakes of the bubble era. That is the grand illusion waiting to be toppled. What fun it will be to see it come down!

When the illusion does topple, though, be sure that you aren’t taken down with it. Or at least be sure that you’ve built a solid foundation that won’t be shaken to core when the walls come tumbling down.


In the news yesterday, the Dow rose 172 points. Oil rose a bit, after a pipeline in Nigeria was attacked. Gold was up a little too – plus $5.

All of this market action is just noise. The real plot to this story is the one we’ve been following here in these reckonings. The world economy is entering a depression. So far, nothing the feds have done has managed to stop it.

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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Jim Ellis

My understanding is, this recession is not a liquidity crisis but an insolvency crisis with the worst yet to come.
The bureaucrats are plugging a hole created by free markets inability to safely allocate capital.
Free markets were given their head, out of the reach of regulation and stuffed it up so badly the whole system is now in danger of collapse. The bureaucrats and their masters have little choice but to put some banks back on their feet so the “free market” can get back to doing what it does best.

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