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Are Markets to Blame?

Here’s  a letter that I sent earlier today to the New York Times:

Mitchel Abolafia blames today’s economic turmoil on Alan Greenspan’s and Ben Bernanke’s alleged “faith in the self-regulation of markets” (Letters, Jan. 19).

I’ve no idea how much faith Messrs. Greenspan and Bernanke had in markets.  But I do know that, from Adam Smith to Vernon Smith, scholars who brought to light markets’ remarkable ability to self-regulate always insisted that a prerequisite for this self-regulation is sound money.  Sound money, alas, has not been the order of the day.  The shifting, often loose, monetary policies of the past decade severely distorted prices – including interest rates, the prices that coordinate economic activity over time.

With prices and interest rates distorted by government’s monopoly control over the money supply, investors, producers, and consumers were fooled into making choices that seemed reasonable but were revealed only later to be misguided.

The emphasis that scholars through the ages have placed on the importance of sound money is being ignored in today’s headlong rush to convict the likes of F.A. Hayek and Milton Friedman of a crime they never committed – namely, the crime of insisting that markets work flawlessly regardless of the institutional structures in which they are embedded.

Donald J. Boudreaux