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Airplane Crashes and Financial Crashes

May 19, 2010 • Economic Thinkers, Regulation • 157 Views    No Comments

When an airplane crashes, investigators rush to the scene, gather evidence, and ultimately hope to emerge with updated safety suggestions. It would be wonderful if we, when assessing the “flash crash” or slower stock market dives, could also diagnose the problems, identify the faulty mechanisms, and repair or redesign them. 

George Mason economist Russell Roberts tells us, though, that financial crashes are very different from the world of aviation. He suggests that the financial world reflects the interaction of “investors, regulators, and politicians” in which the behavior of one group sets the other two in motion. Consequently, the permutations are infinite.

His advice? He provides a short list from which I especially liked his reminder that “Capitalism is a profit and loss system.” He also says that “Policymakers who make creditors and lenders whole should be excoriated, condemned and called to account rather than praised and honored.”

Your opinion?

The Economic Lesson

Perhaps economist Friedrich Hayek (1899-1992, the Austrian school) summed up our problem when he said “The curious task of economics is to demonstrate to men how iittle they really know about what they imagine they can design.” 

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