Some on the left of the political spectrum have proposed "solutions" to credit problems and health care costs that involve price caps as well as freezes on interest rates. A knee jerk reaction might be that this is a good idea. After all, if higher prices and interest rates are hurting people, why not just make them illegal? The politicians that support these things have been involved long enough in national policy and its effect on the market to know better. Many voters have not. This is why they keep proposing them. Here's a brief explanation of why these policies have never and will never do anything but harm the economy.
The real issue is whether the allocation of capital and resources should be determined by a few individuals or by the cumulative effect of billions of decisions made by free individuals daily. The first is fascism (although proponents will never call it that). The second is the free market. The free market allows rapid adjustment and exposes both good and bad ideas rather quickly. A free individual can make a judgment call on the fly, whereas a committee must schedule meetings and develop consensus which can be largely influenced by political considerations that have nothing to do with good economics.
Price caps for example, have been tried and have always failed. Yet, they continue to be proposed because it can garner quick votes from people who aren't fully aware of the consequences. You have to remember that industries and corporations are not buildings and logos. They're people. If someone told you that your revenue will never be allowed to increase or your income will be determined by a government agency, how long would you stay at that particular job? Everyone wants to do better and improve the quality of their lives. If a new law made that impossible in your current field, you would likely start looking for another field. The result will be to drive the best and brightest out of the industry in question, as well as investment dollars. In health care for example, the industry would not go away, but the quality and the pace of innovations would nose-dive.
The mortgage industry extended too much credit to bad risks; people who couldn't afford to keep the commitments they were enticed to make. Cosequently mortgage companies have had to take huge write-downs on loans that will not be repaid and have had to tighten credit availability. These are market forces in action. The market has forced the industry to adjust because it was heading down the wrong path. Capping interest rates would only make credit tighter. If one can't charge higher rates for higher risk, one will not take the risk. Making risky loans is....risky. But eliminating risk means eliminating innovation. The more one ensures that failure can't take place, the more one ensures that success can't take place. For innovation to take place, we must allow failure. If you lose a home you couldn't pay for, you haven't really lost anything. It was never yours. Financial calamity can be traumatic. It's not the end of the world. People deal with it and recover from it every day.
Prices and interest rates are symptoms, barrometers, governors that tell us how our decisions are impacting the decisions of others. Removing these governors would essentially make us a market dictatorship. Your purchase and investment decisions are your votes. You determine whether or not more of something is produced and at what price every time you buy something. You determine what interest rates ought to be every time you sign a financing agreement. Capping prices and freezing interest rates would eliminate your right to vote in the marketplace. Learn how the market really works. Don't join the chorus of those who would destroy it.
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