When The Real Cost is Hidden, Making Good Decisions Is Impossible

When good decisions are no longer possible, bad decisions are inevitable.

If we had to summarize the response of the Federal government and the Federal Reserve to the structural financial crisis of 2008-2009, we could say that both institutions went all-in to obscure the real price of credit and capital.

The real cost of credit and capital is discovered by open, transparent markets. When a central bank sets the price of credit, it destroys the market's price-discovery process. When the government subsidizes certain types of credit, for example, home mortgages and "cash for clunkers" auto loans, it destroys the market's price-discovery process.

This distorts not just the price of credit, but the price of everything purchased with credit. This is the origin of bubbles, and of the resulting busts.

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