“Somewhere, over the rainbow, way up high.”
Federal Reserve Board chairman Ben Bernanke delivered a speech on April 13 on “Rethinking Finance.” It certainly needs to be rethought at the highest levels. Unfortunately, Dr. Bernanke has not yet begun the process. Thinking, yes. Not rethinking.
He ended his speech with this:
The financial crisis of 2007-09 was difficult to anticipate for two reasons: First, financial panics, being to a significant extent self-fulfilling crises of confidence, are inherently difficult to foresee.
This is wrong on two counts. First, in a free market, there are no self-fulfilling prophecies. That is because of the widespread distribution of knowledge. A self-fulfilling prophecy is said to take place because lots of people expect it to happen. But why would lots of people expect it to happen? Because (1) there is something fundamental taking place and (2) people share the same economic theory.
Then why is there ever a panic? The free market pits buyers against buyers and sellers against sellers. Why wouldn’t those with the best information sell the assets over time, as accurate information spreads? Why is there a panic? Why don’t prices come down in a more steady, orderly way? If someone issues a prophecy, it is not widely believed at first. It takes time for people to believe.
Read More at lewrockwell.com. By Gary North.
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