From central planning to central banking: What a long strange trip it's been

The demise of the USSR marks capitalism's final triumph over communist countries' attempt at central planning. The Soviet Union's demise in turn invigorated deregulation of many industries in Western countries which had traditionally been characterised by a market approach. Ironically, however, a growing tendency towards resource allocation on the part of central banks is also observable since the fall of the major communist countries. Since the 1980s, the Federal Reserve has repeatedly intervened in private markets to redirect investments into specific industries (e.c. housing market). Similarly, the Federal Reserve and other U.S. government agencies have frequently resorted to extending extraordinary assistance to large, complex financial institutions in danger of failing (too-big-to-fail doctrine) as well as establishing markets for securities which would not have developed in the private marketplace (e.c. mortgage-backed securities via the government-sponsored enterprises).  

Although ostensibly dedicated to free and private markets, man over the past several decades has, under the auspice of the Federal Reserve, fallen victim to what Hayek termed the "fatal conceit", the notion that "man is able to shape the world around him according to his wishes." This has resulted in an ever-increasing reliance, and in fact dependency, on the government, particularly in times of crises. The frequency of crises, in turn, seems to have been increased by those government interventions, as sheltering private firms from market forces, establishing securities markets as well as redirecting investment flows and thereby promoting asset price inflation have often led to bubbles, triggering de novo interventions, often aimed at countering the dismal results of prior attempts to manage the economy. Since the recent financial crisis, the major Western nations are caught in a low growth trap which major central banks, again, try to counter by pursuing ultra-low interest rates in an attempt to stimulate economic activity. Again, the monetary policy has been encouraging speculative behaviour in various asset classes, leading to a significant underpricing of risk globally. This may set the stage for another crisis and a repetition of activist central bank responses which may attenuate the economic downturn but at the cost of heightened future instability.