When government intervenes too strongly in the market the feedback mechanism breaks that provides the market with the correct information so that it can compensate. This certainly happened in housing and the feedback also got messed up in the energy markets but it’s not totally clear to me how (too much money, blatant market manipulation, etc?).
There is no doubt we have the government intervening in the financial and auto markets, an effort that appears to both prevent failure and allow the government to control the pay (and more I’m sure) of private executives and the governance of corporations. Cafe Hayek has a good post on how this type of action messes with market feedback.
If government prevents ineffective producers from failing, the red light on the “economic traffic signal” stops working. Production continues and resources flow when they should halt, destroying wealth instead of creating it.
For example, General Motors is now preparing for bankruptcy. Seems like everyone would be better of if they had started this process months ago?
