Here’s a fun tidbit from our friends at the Federal Reserve, out economy is not going to be getting any better this year. When last they spoke (oh, gosh, must have been.. four weeks ago) they said that the best we could hope for would be an economic recovery in late 2009. Now they’ve since come out and said that we would see no recovery this year.
Hmmm. Well if that’s the case, why is the government spending all of this money to “stimulate” the economy and bail people out? Was that to speed us to a swift recovery? Now I understand that back before the days of the Fed, when downturns or banking panics would happen, that they might take a year or so to work themselves out. The Panic of 1907 took less than a year. The Panic of 1893 didn’t see the market bottom for more than a couple of years. But that was back in the economic dark ages. Back when our money was backed by gold and we didn’t have sage bureaucrats or wise central bankers ready to print money at the drop of a hat (roughly $13 trillion and counting according to Bloomberg) to bail everyone out. Why, wasn’t the whole reason for all of this stimulus and bailout so that we wouldn’t have to far a protracted economic downturn?
Well, that was the justification given for it anyway. Liquidation doesn’t work is what Ben Bernanke told us, it just makes things worse. So instead let’s bail out the troubled economic actors and get back on the road to a quick recovery. The Fed is now admitting that this recovery of there’s is not going to come quickly. In fact, in comparing the amount of time old style economic liquidations used to take compared to take, the post economic recoveries of the Fed era seem to take quite a bit longer. As I discuss in my book, when you compare the economic history of the pre-Federal Reserve era to what took place after the Fed, it’s pretty clear that we went from an era of frequent economic panics to infrequent economic collapses. That suggests that all the Fed is doing is to postpone an economic downturn until later, but at the cost of greatly adding to its length. Which isn’t really all that great of a service to society when you think about it?
Furthermore, it suggests that the thinking of the classical economic era was right all along. Economic downturns are caused by the contraction of credit after an era of monetary expansion; they are unavoidable and are necessary to, as Hoover’s Treasury Secretary Andrew Mellon said, “to purge the rottenness from the system.” Keynesian economists often attack this kind of think as barbaric, or, as they term it, “procyclical.” If you allow institutions to be liquidated, then it will worsen the economic downturn because the added affect of all of those people being put out of work. And the resulting drop in consumer demand will cause yet more cutbacks in factory output, which will put even more people out of work. Instead, you must prop up the failing institutions so that there workers can keep demanding goods and stop the cycle of contraction.
That was the theory of John Maynard Keynes anyway, and look at how well it’s worked for us. Since the Fed was into existence and Keynes wrote his great theories, we’ve had the Great Depression, the stagflationary decade of the 1970s, and now this crisis which, according to the Federal Reserve, shows no sign of letting up this year. I can hear the strains of Edwin Starr’s War in my head. “Fed. What is it good for? Absolutely nothing! Say it again.” This is a question that I’d love to hear people ask, but I’m pretty sure that it never will. Too many people in power have too much riding on the existing system to ask unseemly questions about whether or not it’s actually made us any better off. Such is life.