The parable of the broken traffic lights

A parable seems appropriate for a Sunday. Steve Horwitz, writing at The Freeman, explains the Austrian perspective on booms and busts using traffic lights all set on green, causing city-wide accidents:

Of course robust economies can mask underlying discoordination for a fairly long time before it is revealed.  A city suffering through a plague of all-green traffic lights sees a more immediate and visible result.

Like our drivers, borrowers were not irrational during the boom.  They simply responded rationally to an irrational signal.  The source of that irrational signal was the Federal Reserve System.  The next time a friend blames the boom and bust on irrational investors, you might recall our protagonist’s city and say: “The irrationality, dear friend, is not in our markets but in our government, that is, the central bank.

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