The US is rapidly moving to a form of "social capitalism" used in Europe and Japan that could result in a loss of what was most admired about the US, i.e., a robust, global and extremely flexible economy. In Japan's Heisei Malaise, more than 10 years and hundreds of trillions of yen as well as years of effectively zero interest rates failed to accelerate a numbingly slow de-leveraging and consolidation of the nation's banking sector. Then, the US was lecturing Japan to "aggressively write off/liquidate the banks non-performing loans".
Somewhere between then and now, the US did a 180, and are now trying to do exactly what Japan did.Remember Ludwig Von Mises? He was a proponent of the Austrian business cycle theory, which explains of the phenomenon of business cycles (or credit cycles) as being caused by inherently damaging and ineffective central bank policies in that the tend to artificially set interest rates too low for too long, resulting in excessive credit creation, speculative bubbles and artificially low savings. A correction or credit crunch – commonly called a recession – occurs when credit creation cannot be sustained. The money supply then suddenly and sharply contracts when markets finally clear, causing resources to be reallocated back towards more efficient uses. The process can be painful, but in the end is the quickest most efficient way to deal with the problem, i.e., let the free market handle it. The effect of the expanding credit cycle on the business cycle is emphasized by some economists at the Bank for International Settlements, and by a few mainstream academics such as Hyman Minsky and Charles P. Kindleberger.
Hyman Minsky is also known for what is called the Minsky Moment, i.e., that point in a credit cycle where investors have cash flow problems due to spiraling debt to finance speculative investments. At this point a sell-off begins because no counterparty can be found to bid at asking prices, leading to a sudden precipitous collapse in the market clearing asset prices and a sharp drop in market liquidity. In other words, what we have seen in the global credit markets is a Minsky Moment.
While the Fed’s Ben Bernanke and Hank Paulson of the treasury have been literally screaming that a comprehensive rescue package is of the utmost urgency. Investors were and are not so sure that a misguided rescue package would not cause more damage than it would prevent. Free market economists such as those at the Ludwig Von Mises Institute that the central bank is a source of the problem, not the solution. In addition, while they believe the financial system must be rescued, they believe it must be rescued from the institutions holding bad debt that are currently draining capital while waiting for a bailout and adding little in return.
