Posts Tagged ‘incentive’

“Japan recently announced it was implementing a negative interest rate.  The central banks of Denmark, Norway, and the European Union are already using negative interest rates.  And last week, Janet Yellen, head of the Federal Reserve, said the Fed is considering it, too….  A negative interest rate means the price of money is below zero….  So why are central banks setting negative interest rates?  They’re experimenting.  They hope negative interest rates will lead people to spend more, and borrow more, and invest more.  They hope negative interest rates will lead to economic growth.  Why?  Because if it costs you to keep your money in the bank, you’ll have more incentive to take your money out and spend it.” -Tom Dyson

“This paper has investigated the effect of government assistance on bank risk taking. While we do not find a significant effect of government assistance on the aggregate credit supply, our results suggest a considerable effect on the risk of originated loans.

After being approved for federal funds […] participants issue riskier loans and increase capital allocations to riskier, higher-yield securities, as compared to banks that were denied federal funds. [T]he net effect is a significant increase in systemic risk and the probability of distress at approved banks. Overall, our evidence is broadly consistent with the theories that predict an increase in risk taking incentives as a result of government protection.” -Journal of Financial Economics, Professors Ran Duchin and Denis Sosyura

Forcing people to take certain actions, or make certain decisions isn’t healthy.  As Bill Bonner notes about force, “People don’t get what they really want; they get what someone else wants them to have….  And since all value is measured by what people really want and freely choose, it makes the world poorer.”

There are many things being pawned as incentives which could easily be called force.  Bill points out that artificially low interest rates may persuade people to take out loans they normally wouldn’t.  And what about tax credits for buying cars, changing windows and doors, putting in new furnaces, buying new homes, etc. 

Now, on the surface, these may seem like good things, but how many people purchase these things not being able to afford it?  How does this alter the normal course of purchasing products as people see fit, or as they afford them?  What happens after these incentives expire?  Seems as if there would be large lulls in the purchasing of these products.

Private choice, in all aspects of life, provide true freedom.  Forced economics results in a false economy.