Interesting post this evening from Zero Hedge (http://www.zerohedge.com/article/fed-discusses-relevancy-invisible-hand)
Two things come to mind. One is that maybe markets are less efficient when capital is too cheap? The other is that maybe innovation and value creation are enhanced when capital is more expensive?
Practically speaking, capitalism did help bring the US to global preeminence during the 20th century and helped make allies out of enemies. It has polarized nations as an ideology, but it has created (or usurped) more wealth than any system prior.
Capitalism has only been tested when it has reached excess, and has not been blamed for being too frugal. As a result it has been bubbles that have tested and tarnished its reputation, not its inability to create constructive social order and real tangible value.
There have been many accounts of financial bubbles over the centuries, all of which are great examples of the failure of markets, but most of which, if not all of which can point to excessive leverage as a root cause. What is it that leverage does to the system that creates inefficiency? How does cheap money create the misallocation of capital?
There are a lot of long answers to those questions, so I’ll leave them open for discussion, if anyone is indeed reading this.
However the other point I made earlier was to question whether higher costs of capital (no or little cheap access to money) creates better selection criteria through which new ventures are funded, borrowers are evaluated and markets find efficient sources and uses. While hawkish monetary policy would be expected to depress asset values, it may also be the catalyst for reconstructing America, when you combine it with American creativity and ingenuity. When I think of things like nuclear technology, space travel, the internet, the personal computer and most modern industrial technologies, many of the greatest discoveries occurred when the US economy was growing at a “much slower” pace, and when much of that R&D was government-funded or co-sponsored.
Projects as large and important as atomic energy, the internet and space travel are too expensive for private industry to undertake and often have little to no visible profitability in their infancy. Private markets often miss the largest advances because no one organization is large enough, or structured willingly to take that much risk.
This is not intended to be a commercial for high interest rates, and large government. I am all for free markets. However I am on the fence as to whether free markets ought to be driven by free (or practically free) capital. There seems to be no simpler way to manage risks in the system than to simply raise the bar on what makes a good investment.