It’s been two years since my last major post on this issue.? A lot has happened since then, much of which points out the truth of what I said.

If governments could be powerful enough to insure the security of individuals, and not harm the ability of the economy to grow, I would not be as strident on this point as I am.? I agree with Minsky on description, but disagree on prescription.? Minsky’s prescription was that of Keynes, but on steroids.? Run a hyper-stimulative monetary and fiscal policy.? Well, we have that now, and it is not helping much; it only balloons the national debt.? The right answer is to do almost nothing, but provide for ways to expedite bankruptcy claims.

Why such a harsh prescription?? We don’t want financial institutions, much less large ones, to rely on the idea that the Federal Government has their back.? That leads to excessive risk-taking.? We also should not want the US Government to be deeply involved in the financial sector for several reasons:

• The Treasury will be captured by financial interests (already done!)
• Fair pricing of loan yields versus marginal cost of taxation will get muddled.
• Political haggling will choke Capitol Hill.
• The blob will grow.? No, not the Department of Education, a la William Bennett.? I am talking about the Fed.
• Individuals and corporations will be more cautious about their finances, and will manage them more prudently.

Aside from constraining the total leverage of the economy, which I have suggested in the past, there is no way of escaping the pains of the boom-bust cycle.? I would say to everyone, “Grow up.? Our Government can’t control the economy in the long run, so accept that, and live with the boom-bust cycle.? Eliminate government meddling, especially the Fed.? All attempts to smooth the cycle lead to a bigger bust later.? Would you rather take some pain now, or risk the creditworthiness of our nation?”

One reader has recently asked me about sovereign defaults.? I need to think about that, and give you all a better piece later, but this is not a time to be careless about the US, unless the political mood so changes, that large tax increases would happen.