True North

When cornered by the media early last week, U.S. Senate majority leader Harry Reid warned that a solution to the turmoil in the financial markets wouldn't be forthcoming soon because, "No one knows what to do." A few hours later, Reid and a collection of bureaucratic and congressional cognoscenti emerged from a closed-door meeting knowing exactly what to do - put taxpayers on the hook for Wall Street's debt so bankers and brokers could take a balance sheet "mulligan."

Many politicos and pundits portrayed the prospect of a free-market Republican administration advocating government intervention and virtual public ownership of major financial institutions as the Armageddon of unfettered capitalism and the resurrection of more activist government.

But increasing uncertainty about the details of the proposed bailout and efforts to expand its scope only reinforce the reality that there is no one solution to the crisis, only trade-offs. Government bureaucrats necessarily lack the knowledge required to decide what those trade-offs ought to be. That is knowledge a single group does not have and cannot ever have. It's knowledge embedded in the market.

Like the six blind men who went to see the elephant, economists, pundits, politicians, war heroes, former community organizers and ex-small town mayors have been running their hands over the situation, and not unexpectedly, their assessments match the part they happen to be yanking on.

The inability at the highest levels of government to see the whole problem is the fundamental flaw with Washington's economic mulligan. Policymakers may have a plan that fulfills the collective desire to "do something," but Reid's original assessment is still most astute - no one really knows what the whole problem is.

Any plan coming out of Washington is based on three dubious assumptions, taken for granted: that the gathered officials possess all relevant information; that their desired objectives are achievable; that they possess the authority to implement their plan.

Accepting those assumptions, policymakers approach the economic crisis as a complex puzzle. The truly believe that a bunch of really smart people can solve it, given enough money and the coercive power to guarantee compliance.

In his essay "The Use of Knowledge in Society" F.A. Hayek takes up the general case and notes that the economic problem of society does not have a strictly logical solution. As Hayek explains, "The reason for this is that the 'data' from which the economic calculus starts are never for the whole society 'given' to a single mind which could work out the implications and can never be so given."

Paraphrasing Hayek's general argument and applying it to the specific case, the financial crisis facing our elected and unelected officials is not simply a problem of how to "adjust" existing market factors to preserve the financial system when "adjustment" assumes that all relevant information is available to those crafting the plan. Rather, the problem is how to facilitate the most effective adjustments in the economy to the benefit of any member of society, "for ends whose relative importance only these individuals know."

Policymakers are laboring under the misconception that government can somehow come up with a solution that will simultaneously punish the wicked, reward the righteous, leave the ignorant blissfully blameless and the rest of us financially intact. The reality is that objective is unobtainable; there is no one solution, only trade-offs. And right now armies of lobbyists are clashing on Capitol Hill over just what those trade-offs are going to be and who will impose them on the rest of us.

When battle ends, bodies will be buried and poppies planted and victory declared for a "solution" that serves visible collective ends but has only serendipitous connection to the unseen ends important to any individual, of which no bureaucratic planner can ever have complete and timely knowledge, empathy or concern.

We don't need better policy for management and oversight of the financial markets. We do need policy that better facilitates dispersing economic knowledge to those making everyday economic decisions. From the creation of Fannie Mae to passage of the Community Reinvestment Act, government interventions have jammed the economic signals that the market needs to function effectively. Government policy has created moral hazard that breaks the bonds of market discipline and unchains greed and recklessness. We may be blind to the whole cause of the current economic crisis, but government intervention is the elephant in the room.

Craig Westover is a contributing columnist to the Pioneer Press Opinion Page and a senior policy fellow at the Minnesota Free Market Institute (www.mnfmi.org). His e-mail address is \n This e-mail address is being protected from spambots. You need JavaScript enabled to view it This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

This column originally appeared in the St. Paul Pioneer Press, September 25, 2008. See also "The Elephant in the Room" at the Center for the American Experiment.

Cross-posted at Minnesota Free Market Institute.