The Failure of the System

The primary failure of the system has been the unwillingness to allow markets to clear.

Whether it has been the unwillingness to allow housing to clear, or the unwillingness to let insolvent institutions go bust, or the unwillingness to address structural deficits or unfunded entitlement liabilities, markets must be allowed to clear when they become unbalanced.

Markets get out of whack for a variety of reasons. Whether it is due to externalities (poor regulation and regulators, perverse incentives, the guiding hand of the Fed, moral hazard, etc.), or because they reflect the mass delusion of crowds, markets need to be allowed to clear before they can operate effectively again. By shooting the messenger (thereby trying to prop up prices), authorities are addressing the symptoms rather than the cause.

In many ways, the crisis of the last few years has been a failure of the visible hand, as much as a failure of the invisible hand.

The reasons given for bailing out entities or propping up prices are noble (in a way). To defer, delay, take away the negative social effects/impact of market collapse (usually for political reasons). But there is a cost to artificial intervention, and sometimes the cost is greater than the initial price tag.

It remains to be seen how all of the bail-outs of the recent past will pan out.