The Calling | Steven Horwitz
The Parable of the Broken Traffic Lights
Bad signals.
Posted March 15, 2012
"... When the central bank intervenes, however, it turns all the lights green. Expansionary monetary policy provides loanable funds to banks, which enables them to lower rates as if there were more saving. However, that saving is an illusion; consumers have not become more patient. With lower rates, borrowers find longer-term projects more profitable and so divert resources to them and away from others. The problem, of course, is that consumers do not in fact wish to wait longer than they did before. So producer-borrowers invest in longer-term projects while consumer-savers continue to want relatively shorter term ones. This, like traffic patterns with broken signals, is not sustainable and will eventually lead to the economic equivalent of car crashes: the onset of a recession as this discoordination is revealed...."Mais
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