Misguided Policy

Good government is expensive (and can even be wasteful), but bad policy imposes an even greater cost on society. Here are 20 examples of misguided policy.

And #4 regarding Prohibition:

In the name of public morality, the United States prohibited the sale of alcohol from 1920 to 1933 via the Eighteenth Amendment to the Constitution. This period, known as Prohibition, proved to be a disaster.

Source: Alvin E. Roth. Who Gets What—and Why: The New Economics of Matchmaking and Market Design. Houghton Mifflin Harcourt, 2015. [B054]

The man most responsible for #5 (the Subprime Mortgage Crisis) turned out to the Maestro himself, Alan Greenspan. Remember, "Alan Greenspan was a genius (keeping inflation in check) until he wasn't anymore (because loose money fueled the asset bubbles)"1. "As the economy grew and grew, Greenspan was ascribed ever greater power and omniscience in the financial media and on Wall Street"6. For instance, "Alan Greenspan, when he flooded liquidity in the market in 1987, caused problems to disappear quickly. [...] Greenspan became motivated to flood liquidity in response to any, and every, other problem as well"7.

After the financial crisis, "one of the first casualties was the former Federal Reserve chairman Alan Greenspan. [...] As the chairman of the Federal Reserve Bank from 1987 to 2006, Greenspan was one of the most respected central bankers in history, serving an unprecedented five consecutive terms, strongly supported by Democratic and Republican presidents alike"2. Adds famed author Michael Lewis: "That [Alan Greenspan] kept interest rates too low for too long is the least of it. I'm convinced that he knew what was happening in subprime, and he ignored it, because the consumer getting screwed was not his problem"5. 

Alan Greenspan has since been panned from all sides. Warren Buffet suggested Alan Greenspan had overdosed on Ayn Rand, "adopting the belief that if things happen in a free market, they must be okay"3. Investor Bill Fleckenstein isn't any kinder: "People don't understand what a completely reckless and incompetent fool Greenspan was, even to this day," [Greenspan oversaw] the abolition of the Glass-Steagall Act, which until 1997 separated commercial lending from riskier investment banking activities"4. It doesn't end there, Greenspan was painful wrong on the issue of derivatives, which exasperated the 2008 financial crisis. As Satyajit Das writes:

The major defender of derivatives was Alan Greenspan, Chairman of the Federal Reserve Bank of New York. [...] "I am quite confident that market participants will continue to increase their reliance on derivatives to unbundle risks and thereby enhance the process of wealth creation." Thus spake Greenspan.

Source: Satyajit Das. Traders, guns and money. Pearson UK, 2020. [B177]

In fact, according to Andrew Lo (2017): 

Greenspan was a true believer in unfettered capitalism, an unabashed disciple and personal friend of philosopher- novelist Ayn Rand, whose philosophy of Objectivism urges its supporters to follow reason and self-interest above all else. During his tenure at the Fed, Greenspan actively fought against several initiatives to rein in derivatives markets. 

Eventually, "Greenspan was forced to admit he was wrong: 'Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief'."2

There's quite a bit of evidence regarding #13 (the gold standard and the Great Depression):

Peter Temin [wrote:] "It was the attempt to preserve the gold standard that produced the Great Depression". As [Dartmouth economist Doug] Irwin explains, "This 'gold hoarding' created an artificial shortage of reserves and put other countries under enormous deflationary pressure."

A gold standard can turn a recession into a depression, as it arguably did in the 1930s. When an economy is weak (as in the United States in 1929), the best policy response is to lower interest rates to stimulate demand. But lower interest rates will cause foreigners to demand gold for their dollars so they can invest elsewhere in the world; gold will flow out of the country. The result is a dilemma: to defend the nation's gold reserves, a central bank must raise interest rates—even though a weak economy needs the opposite.

The countries that did not adhere to the gold standard managed to avoid the Depression almost entirely (China, for instance). The countries that were first to leave the gold standard (such as Britain) were the first to recover. The countries that stayed on gold longest had the deepest and longest depressions (the United States and Germany).

Source: Charles Wheelan. Naked Money: A Revealing Look at what it is and why it Matters. WW Norton & Company, 2016. [B046]

Lastly, an oversimplified blurb on #14 (but a more detailed explanation can be found in the book):

The South Sea Bubble similarly arose from the British government's desperation to get its debt under control.

Source: William Quinn and John D. Turner. Boom and bust: A global history of financial bubbles. Cambridge University Press, 2020. [B214]

Sources

1: Charles Wheelan. Naked Economics: Undressing the Dismal Science. WW Norton & Company, 2010. [B047]

2: Andrew W. Lo. Adaptive markets: Financial evolution at the speed of thought. Princeton University Press, 2017. [B116]

3: As quoted by: Daniel Pecaut and Corey Wrenn. University of Berkshire Hathaway: 30 Years of Lessons Learned from Warren Buffett & Charlie Munger at the Annual Shareholders Meeting. United States, Pecaut, 2017. [B221]

4: As quoted by: Richard Teitelbaum. The Most Dangerous Trade: How Short Sellers Uncover Fraud, Keep Markets Honest, and Make and Lose Billions. John Wiley & Sons, Inc, 2015. [B182]

5: Michael Lewis. The big short: Inside the doomsday machine. WW Norton & Company, 2011. [B020]

6: Michael Lewis. The fifth risk: undoing democracy. Penguin UK, 2018. [B023]

7: Amit Kumar. Short Selling: Finding Uncommon Short Ideas. Columbia University Press, 2015. [B013]

A Little Bonus

A few more from a Chron slideshow (featuring apartment buildings in someone's backyard, a house next to oil refinery, and a crematorium next door to a single family house):