Sunday, September 11, 2011
I was taught Keynesian theory at Campbell University. It is a system of monetary control disguised as an economy. Its science is invalid because it cannot take into consideration variables in human behavior, which is what defines a truly free market. Instead Keynesians apply Empirical Data all historical of course. It's like predicting the weather. Meteorologist use all sorts of Empirical Data, satellite photos, wind speed, pressure readings, etc. all historical, and obviously the best predictor is having the most recent data available. My feeling is that you just stick your head out the window.
The problem with that system is it doesn't consider the "people variable". This variable is what happens outside the box of historical data. For instance, if I'm looking into buying a stock, I want certain historical data, and I want it to be as up to date as possible. I can do all my "homework" and yet the unforeseeable still may happen, which distorts the equation. Thus the result is "none of the above" or actually a non-result because the outcome doesn't fit one of the multiple choice answers required in Keynesian theory. In my view, I'm either willing or not to assume the risk that an earthquake or war or whatever may change the outcome. In Keynesian theory, the system of control, risk is minimized by nanny government. Although risk exists, the negative effects are externalized. In other words, as in recent examples, corporations are "too big to fail", they take stupid risks, and externalize the damage by passing the debt to someone who doesn't know any better.
I'm no expert in Austrian economic theory, but I have a gut reaction. Let the market adjust as it will. Assume market risks and act responsibly. No entity is too big to fail, in fact an indicator of imminent failure is bloat. It is appropriate for markets to fluctuate, and too big to fail probably means a company went too far for too long.
There are many examples of recent activities in our markets that smart investors would have avoided had they felt the need to act responsibly. The so-called mortgage crisis is a fine example where "investors" bought worthless derivatives as "investments", and knowing they were worthless, bought insurance against loss. They bankrupted the insurance company because the losses were too sudden and too great. And who will eventually pay the bill? I'm guessing the European Union is paying for those mistakes today. They hold an empty bag of debt that they're trying to pass on with no takers. France, England Germany are on the list of future collapses. My understanding of the empty bag is a debt of 600 trillion dollars plus (debt with no resource to justify it) which our central bank somehow managed to pass on to Europe, and you've heard about Greece, Portugal Spain, Ireland, possibly now France "austerity measures". It seems these people must cut back on their living standards to foot the bill for central bank errors.