Responsible Parties

Who’s at fault for the lousy economy we have?

It’s fashionable to blame the 1% for the financial crisis, or to blame economists, or the credit rating agencies, or Barney Frank. Some people even blame it on solar flares and sunspot cycles. But the real culprit in the crash was a set of expectations that came from a couple decades of relative macroeconomic calm.

It was fashionable prior to the crisis to refer to the “Great Moderation,” the period of economic stability that began in the mid ‘80s. Prior to then, we’d had recessions every 4-5 years. From 1983 to 2003 we only saw two recessions—one every ten years. At the same time, inflation had come down dramatically and unemployment fell even has the workforce expanded.

This period also corresponded to a general trend of deregulation and falling marginal tax rates. So it’s easy to blame these for the market crash of 2008 and the economic malaise we see today. But the case for deregulation and free markets was never that markets are perfect. The case for free markets is that government control has always been worse. Free markets are the worst system ever devised—except for all the others.

During the early 2000s we thought we had tamed the business cycle so we could all take on more risk. We were wrong; there is no free lunch. Our expectations need to be realistic: human nature hasn’t changed, and markets will fluctuate, sometimes violently.

Blaming others for our problems may seem to feel good, but it’s really counterproductive. The best way to get out of a hole is to look for a ladder.

Douglas R. Tengdin, CFA
Chief Investment Officer
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