July 4, 2008
The
high price of ignoring the effects
One of the
very first lessons any child learns is that when you
touch the stove you get burned. If you fall you may
scrape your knee. Simple lessons in cause and effect.
However, a funny thing happens when you grow up. You
forget these fundamental principles. You forget that
when you spend money beyond your capability of paying
the bill you get in trouble.
Today, in the adult world, the law of cause and effect
has morphed into the “law of unintended consequences,”
the implication being that the possibility of anything
going wrong was not anticipated. Some current examples
in the adult world illustrate the basic principle
of cause and effect gone awry and how it needs to
be resurrected. It should be a fundamental principle
for policymakers.
Cause
and effect
The business
community prefers to let the free market solve the
economic problem without intervening regulation. However,
the subprime mess is a vivid example of the limitations
of the free market and a prime example of what happens
when there is no understanding of the principle of
cause and effect. The passion for fast money on the
part of individual mortgage brokers and big bankers
(cause) has resulted in a cataclysmic failure of the
real estate market and a major hit to the banking system
and the U.S. economy (effect).
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