Path of Least Resistance
Here are some quick thoughts I had about the nature of our current economic crisis in an e-mail exchange with some friends:
Another way to look at this is like a physical or chemical system. Electrons follow the path of least resistance and chemical reactions occur via the pathways of least resistance. It's the same thing in the markets. Everyone (including each of us) is interested in making money through the path of least resistance (legally, of course). That is, we seek to make money doing what we're best at and using systems and processes we understand.
Now, when the government implements any regulation--any regulation--it has the automatic effect of hindering the smallest players the most and giving the biggest players incentives to find clever ways around the regulations (which they can more easily do because of their resources). This, of course, is why we often see the biggest players in a given industry lobbying for government regulations--it gives them a leg up on their smaller competitors. They find that it's easier to get the laws changed than to work harder at providing better and cheaper goods and services to their customers. They take the path of least resistance.
When it comes to housing and the financial markets, there's been so much regulation and meddling and anti-market activity by the government since 1913 (and even earlier) that what we have is a system that creates myriad paths of least resistance (or less resistance) that are vastly different from the paths that would exist in a perfectly free market--and it all results in a transfer of wealth from smaller players to bigger players and from tax payers to the companies that help write the regulations.
It's funny (or maybe not so much) that socialists and libertarians correctly identify the same end result but the socialists' solution (always more regulation and actions by government--like caps on executive salaries) is exactly the wrong thing to do. The libertarians always try to point out that it's the laws and government agencies (and GSEs) that caused the problems in the first place and are what should be eliminated without delay.
Of course, the guy on the street, being convinced by decades of government education that every problem he observes is due to a lack of government control, rails at the big bad businesses and says, "Stick it to 'em, Uncle Sam!" Sadly, these "big bad businesses" (even those who had nothing to do with the laws) are simply following the path of least resistance as it's been laid out for them by the regulations demanded by the frightened populace, written by big industry players, and eagerly promulgated by the parasitic politicians.
Now we face the prospect of a government "fix" for the current crisis, and it may well put the markets at ease in the short term. But it will do so by temporarily putting off the problem and making it worse, so that when the time finally comes for a true market correction it will be far worse than we can possibly imagine. I can only hope that cooler heads prevail between now and that future day and we find a way to extract the government from our economy without plunging ourselves into a new Stone Age (which is the only possible outcome of continued government interference).
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