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Monday, March 30, 2009


I first heard about the existence of http://www.financialstability.gov/ in an EconBrowser.com post here. I hear the term "stability" used constantly, mostly in a foreign policy context as in "we need to promote stability in a particular region" and it always confused me. Now we are hearing this concept applied to the economic system, namely, that the state must now provide us with financial stability. It prompts the question, what is "stability" in this context, and is it the government's function to provide it.

Stability can be defined as "firm and dependable; subject to little fluctuation". So, what exactly do the politicians mean when they say that they seek stability? Do they not want fluctuation? They could achieve such a result by threatening to jail anyone that moves - an approach which everyday seems to be more of a reality. Such an approach would result in very little fluctuation. In the sense that the government's policies are destroying the economy, increasing unemployment, and causing producers and investors not to deploy capital - the government's plans are resulting in very little fluctuation. People are not working and the stock market goes down by almost the same amount every day! In this sense, the economy is highly stable.

But is this what the government desires?

In the proper sense, "stability" should mean a system of intelligible laws that are consistent with individual rights, viz. laws that define and uphold contracts, protect private property, a judicial system of common law to provide a basis by which to settle disputes, and a criminal justice system to prosecute and jail those that initiate force or commit fraud. Such a system provides a known legal framework by which one can plan future activities and enter into contracts without the threat that the rules will suddenly change, e.g., one day the government decides that private property rights will no longer be recognized and begins nationalizing major industries.

Accordingly, in the area of finance, not only would it be crucial for the state to uphold contracts and private property, it would be essential that the government recognize and uphold a medium of exchange (money) chosen by market participants which contracting parties could deem acceptable as final payment. This medium of exchange in virtually all cases would be a precious metal such as gold or silver. Additionally, as the U.S. Constitution mandates, the government itself would have to remit payment in precious metals (as well as accept precious metals for payments.)

Such a sound or "stable" legal structure would form the basis for a system of actual laissez faire capitalism. It would be built upon a rational moral foundation consistent with the principle of individual rights and would lead to virtually unlimited economic prosperity and untold human happiness. Such stability would lead to massive economic fluctuations - but to the upside as innovation and wealth creation reached new peaks.

Is this what the government means by stability?

Clearly, the latter approach is not what the government means by stability as nothing they are doing could be regarded as in the direction of more dependable laws based on individual rights. In fact, virtually every legal principle as it relates to the economy has been thrown out the window and made subject to change on almost a daily basis. One used to be obligated to pay their mortgage - no longer. Companies used to go out of business if they ran out of money and couldn't pay their creditors - not today if you are big enough and have political connections. Contracts to pay bonuses used to have legal standing - maybe so until they change the tax law tomorrow which effectively seizes it. Once upon a time, the government had to tax or borrow money in order to spend it - not anymore - they just create it out of thin air.

If the government simply destroyed the economy by say exploding nuclear bombs all over the country, at least the consequences would be known, it would happen quickly, and those who survived could begin the task of rebuilding. From the proper perspective, the current approach is designed to result in almost maximum instability. Nothing can be known for sure except the government is going to do something. Meanwhile, everyone cuts back, employers hedge their risk by cutting costs which means terminating employees, and investors rather than funding new and exciting prospects, move to cash and what else - government bonds.

The financialstability.gov site says that it is "coming soon". I hope not.


Realist Theorist said...

I'd guess the GDP of the Soviet Union was a pretty stable line (albeit perhaps downward-sloping)!

The Rat Cap said...

Yes, prison camps are very stable...

HaynesBE said...

Financial stability = maintaining the status quo = stagnation.

The explicit mandate of the Fed (price stability) is part of the same.

Innovation and progress entail change which means instability.

The creative-destruction of replacing the less efficient with the new-and-improved is the antithesis of all our recent bailouts, which substitutes government coercion for the voluntary choices of the market.

As you point out, the true stability we need is the rule of law in service of protecting individual rights.

Why is this not more obvious to more people?

The Rat Cap said...


The answer to that question is a subject about which I'm taking a stab in an upcoming post. The short answer is intellectual paralysis brought about by the inability to think in principle. To the concrete bound mentality, everything is an isolated phenomena with no connection to anything else. "Stability" feels good to this mentality although they have no way of grasping the wider implications. Hope this is a start.