TightWind is written by Kyle Baxter. Stay Hungry. Stay Foolish.

James Surowiecki comments on market volatility created by increasing (and erratic) government intervention in the economy:

As a result, investors have a vast range of new things to worry about, like voter sentiment in Westphalia. They have to try to figure out whether policymakers will do things they shouldn’t, like slash spending during a downturn, and not do what they should, which is to intervene promptly when systemic crises appear.

He’s right that government intervention is creating uncertainty in the market, but his solution–that governments intervene “promptly” during crises–is exactly wrong.

Bubbles certainly are inherent to markets, but systemic crashes are not. The financial crisis we experienced in 2008 was a result of a housing bubble that the federal government (1) funded through low interest rates and the GSEs (Fannie Mae and Freddie Mac) and (2) encouraged through prior bailouts of ailing banks. This created an environment where risks were not properly considered precisely because of what Surowiecki recommends: Government would intervene if the bubble burst. And that’s precisely what they did.

We shouldn’t be creating standardized and routine government intervention in the economy to protect failing institutions. We should do the opposite: make clear government will not save failing firms nor their creditors. Government protecting firms and creditors makes Washington, D.C.’s whim, and not a company’s own fundamentals, ultimately responsible for a company’s success.

That isn’t capitalism. It’s authoritarianism, with markets merely serving the government’s desires.