Thursday, November 20, 2008

Economic Recovery & the Lessons of History

Jonah Goldberg on The Corner posted the following remark from one of his readers, along with an interesting chart. The chart shows how bold experimentation by the government after the crash of 1929 actually destabilized the stock market, and maintained the financial collapse for years afterward, which became known as the "Great Depression". Are we about to repeat this again?

Bold Experimentation
[...] Free market economics involves the application of immutable laws, and it's those laws that allow us to forecast the effect of current events on various companies and the stocks and bonds they've issued. But investors will only play the game if they believe the rules aren't going to change in the middle. When government begins 'experimenting', it makes it harder for investors to generate a long term forecast. This drives long term investors away from the market, or converts them into short term traders. The result is a massive increase in volatility as investors shorten their investment outlook because they can't predict what's going to happen far enough into the future.

Volatility is an indication of instability. It's not a sign of a healthy economy but of an economy which has lost its way. High volatility isn't what you expect from the worlds largest market, but from the emerging economy of a third world country. As you can see from the attached chart, when Roosevelt began his 'bold persistent experimentation' it drove away long term investors and that caused volatility to dramatically increase. It will almost certainly have the same effect when Obama does it. [...]

(bold emphasis mine) The big question is, what will Obama, and our Democrat controlled government, do? Learn from the mistakes of the past, or repeat them? When I hear some Democrats talking about the economic crisis as an "opportunity" that they must not "squander", I'm not hopeful that they are thinking about stabilizing market volatility. We shall see.

Related Links:

Looking Back Even Further

An Economic 9/11? A Depression? Trends...

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