The principal problem in economics is the ability to hold one variable constant against an independent variable. Like a juggler with his three torches, everything is in play. This is made even worse by the manipulation of economic definitions by government.
Thus, the definition of unemployment was changed in 1994 to eliminate those who are so discouraged they are no longer looking for work.
The effect of that is that the government said unemployment only flirted with 10%, while an apples to apples comparison saw unemployment go above 20% where it has remained. Use this link to Shadow Stats to get a clearer picture:
http://www.shadowstats.com/alternate_data/unemployment-charts
What conservatives seem to ignore is that these violent swings in the economy give aid and comfort to liberals - we need more unemployment insurance, we need more government involvement. It was extended from 26 weeks by 20 weeks, and then extended again during the Great Recession, and maybe someday they will need to be extended forever. I have written about the problems of an economy which is technology-driven, and continuous replacement of jobs by technology.
Maybe all jobs end up being government jobs, but one way conservatives can forestall the onrush of government is to contain some of the market excesses. We have already cited one. The government should insist that bank keep some significant part of every mortgage that it originates. Skin in the game.
1. We note that the size of banks is still a problem that has not been addressed at all. Hank Paulson spoke about moral risk. How has moral risk been reduced if banks can make crazy bets again and still ask government for a bail out (and issue themselves bonuses for risk-taking)?
It has not. Those banks most at risk should be broken down into smaller banks, and regional banks should be encouraged.
2. Derivatives are still being written outside of an exchanged, and so the risk is not measurable. We have no idea how many times options have been written on the same event.
The excesses of the market system, or capitalist system, are well known. Inventory cycles are well known.
In the late eighteen hundreds J.P. Morgan made a living from railroads with the same cities at the end of the line. They would reduce shipping prices until they went bankrupt. Morgan would be brought in to normalize things. Oftentimes, he would merge the railroads to rationalize these rail resources. In a sense, he was backed into creating a monopoly.
Regulation is the way we keep things from running amuck. Self-regulation is best, but when that fails we need governments to set good rules (as opposed to lousy rules and huge bureacracies to monitor them).
