Force Fed

Now that ain't workin' that's the way you do it
Lemme tell ya them guys ain't dumb
Maybe get a blister on your little finger
Maybe get a blister on your thumb
--Dire Straits

A popular view is that markets are inherently unstable and thus in need of regulation to smooth the peaks and valleys. In fact this was a primary argument for the institution of the Federal Reserve in 1913.

This line of thought is mistaken. Markets seek stability. Buyers and sellers engage in exchange until the price of marginal transaction is no longer seen as beneficial to at least one party. At that price, the market has 'cleared' and stability is achieved. Changes in the marginal utilities between buyers and sellers will drive markets to restabilize at a new price level.

It is intervention that builds instability into markets. Intervention influences prices toward higher (e.g., minimum wage) or lower (e.g., low cost of credit set by the Fed) levels than otherwise would be elected by participants engaging in free, unadulterated exchange. As the influence of manipulation wanes over time (and it always does), price have further to move in order to reach the levels sought be free trade.

Near term reduction in the variation of market prices that sometimes immediately follows intervention (e.g., stock market prices subsequent to monetary stimulus over the past few months) can provide an illusion of stability. All the while, prices are being restrained from the level that will help the market clear.

Once these restraining forces wane, then the instability of intervention will become evident. Interventionists will then, of course, want to do something new to keep market forces at bay.

At some point, however, pent up market forces may be too powerful to restrain.