Stupid People in Government.

I prefer stupid people in Government over smart people. Stupid people might screw things up, but there’s also a good chance that a stupid politician might be so paralyzed by his stupidity that he can’t manage to screw anything up while in office. Not so, with a smart politician; when they see something they want to screw up, they can figure out how to do it every time.

Nothing is worse that a smart politician or bureaucrat who thinks they can outsmart society and the market. Our problems are the result of politicians and bureaucrats who thought they were smarter than the market. We still have problems today because the majority of our political class thinks they are smarter than the market. As “Wealth of Nations” author Adam Smith once said, the smart politician “seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board”.

As Alasdair Macleod of GoldMoney.com says in a well-written article:

Governments have refused to accept the necessity of a period of economic re-adjustment following the credit-bubble. The bubble burst about five years ago and economic progress has been effectively suspended ever since. The consequences of this refusal to accept reality are at a minimum to make this adjustment unnecessarily drawn out and needlessly painful, without offering a better eventual outcome.

Reduced to its bare bones, the choice has been either to accept that unviable businesses and over-extended banks must go bust, or to ignore the problem and hope it goes away. We are familiar with this dilemma as investors: a business that refuses to adapt to new realities will eventually fail. Before it does, its investors have the chance either to sell their shares and perhaps reinvest their money more profitably, or to refuse to accept an early loss on their investment. Most of us, being human, take the latter course and usually regret it.

Businesses fail. Sometimes, really BIG businesses fail. Employees lose jobs. Investors lose money. Some other business with a new approach, or a new method of production, or a new marketing angle, etc, will arise. They hire employees and attract investors. They soak up the market share that failed businesses left behind, usually learning from the mistakes of their predecessors. This is how the market functions in a great “circle of life”, as Mufasa might say on a starry night.

In economic terms, it is better for resources to be deployed efficiently than to tie them up in inefficient or unwanted activity. This is a decision for markets, not governments, which brings us back to the necessity for economic re-adjustment. Governments have simply not faced up to the reality that we are in a post-credit-bubble mess: they still hope the problem will be resolved by time.

Governments are refusing to let markets clear. Prices have not been permitted to fall to a clearing level… They don’t want to face the bankruptcies of the over-indebted, the businesses that rely on the state for their survival, and the banks that have foolishly lent them too much money.

The main logic behind the bailouts was that failing corporations and banks like Citigroup and General Motors were “too big to fail”. Everyone has heard this phrase a zillion times by now. Everybody hates hearing it. There is no doubt that the collapse of these companies would have had enormous and severe consequences. As Macleod points out, the resources tied up in these companies could have moved on (employees, investors, capital, you name it) to be deployed in other more efficient (aka profitable) enterprises. This is a natural process. There would have been pain involved. Mistakes are often painful.

The State stopped this. The State intervened on behalf of numerous Corporations which deserved to fail. Many went on to fail anyway and become total losses. Some have managed to recuperate losses and repay their bailout; but even still, at what cost? Look upon their works, ye mighty, and despair.

Reality is now catching up with western governments. Their underlying financial position is rapidly deteriorating, with welfare costs spiraling out of control and governments already heavily in debt. They cannot realistically underwrite the global banking system, which is insolvent and considerably larger than the governments themselves. …We have progressed to the point where governments have chosen to protect themselves, in preference to looking after the true interests of their electorates.

Governments are now reduced to screwing their electorates for their own survival, which is their last refuge from reality.

They are in “kick-the-can” mode. They are grasping furiously for any “solution” that offers them political convenience. They are doing everything they can to stave off the economic-readjustment (severe recession) that must eventually arrive. I believe they will be able to stave it off for some time yet. They will no longer be in office by the time the hens come home to roost. That is their plan, at least.

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