VC: The Moral Hazard Effects of Current Economic Policy

Cassandra at VILLAINOUS COMPANY, 1/23/2012 - Robert Samuelson [Why the Fed Slept] explains how economic policies aimed at smoothing out the business cycle make the economy less stable in the long run:

Since the 1960s, the thrust of economic policy-making has been to smooth business cycles. Democracies crave prolonged prosperity, and economists have posed as technocrats with the tools to cure the boom-and-bust cycles of pre-World War II capitalism. It turns out that they exaggerated what they knew and could do.

There's a paradox to economic policy. The more it succeeds at prolonging short-term prosperity, the more it inspires long-run destabilizing behavior by businesses, banks, consumers, investors and government. If they think basic stability is assured, they will assume greater risks -- loosen credit standards, borrow more, engage in more speculation, relax wage and price behavior -- that ultimately make the economy less stable. Read more at Villanous Company...