The economic troubles coming in the near future are the sole responsibility of the Federal Reserve, Ben Bernanke, Alan Greenspan, and the Bush administration.
The Federal Reserve system has our country in a constant cycle of debt. There are always periods of inflation and low interest rates, only to be met with higher interest rates and deflation later. The cycle is constantly running, but the time frame changes here and there depending on who is in charge of the Federal Reserve and what policies they have pursued. The Austrian Theory of the Business cycle explains this quite well.
Alan Greenspan was notorious for his low interest rates during the 1980s and 1990s. His inflationary policies in the 1990s allowed for easy loans (at the low interest rates). This leads to one thing: bad investments. People will always borrow at an affordable rate versus the risk. The problem, though, is when a central bank forces everyone to borrow at the same low rate. This means many businessmen and entrepreneurs will borrow money instead of seeking investors, and other companies will borrow money to invest in new operations. We saw the result of bad investment with the crash of the “dot com” boom in 2001.
When investment starts going bad all over the country and banks begin to tell people to pay up, we see a “credit crunch” and the problem we are now having today.
Today’s problem stems from both Bernanke and Greenspan. The housing bubble was predicted long ago when the government made way for people to have low interest rates for their houses, or subprime mortgages. In actuality, the government did not give people their loans directly, but it paved the way for big businesses and banks to give people low interest rates. The banks thought, “Hey, I can afford to give this person a bad loan because the government is backing me up, plus the interest rates are quite low [and steady]!” To no avail, though.
Now the time has come to pay up and the famed business cycle has repeated itself once again. We will hear all sorts of nonsense about prices rising, unemployment going up, and how we need to “spend” to get out of our recession.
The Bush Administration has been spending nonstop for the past eight years and we’re still headed toward a recession. This isn’t talk of regular government spending, either. George Bush and Co. have managed to spend nearly three trillion dollars a year the past few years, up from 2000 levels of around one trillion. If Keynesian theory were right, an injection of over two trillion dollars into spending for our economy would quite frankly give us the greatest economy the world will ever see for a long, long time. Keynes was wrong, though, and spending gets you nowhere.
The way to solve our economic problems is to start by cutting spending. The government should immediately cut at least $2 trillion. Next, taxes should be reduced. Though some fiscal conservatives will argue for both of these, this isn’t far enough, and will only delay the problem.
People should begin to save money and wait out the recession. Spending isn’t going to help, because the only way to spend in a recession on a large scale is to either 1) borrow money, or 2) inflate, neither of which will help the economy in the long run.
The fourth and most important thing is to either eliminate the Federal Reserve or allow other currencies to develop in American society. As Ludwig von Mises showed in his The Theory of Money and Credit almost a hundred years ago, competing currencies often arise when the government does not hold a monopoly on money, and societies benefit from it.
Eliminate trillions in spending, cut taxes, stop inflating, hold onto some money and let the market work itself out. If we keep this absurd policy up of lowering interest rates even more, as well as out of control spending, the Bush Administration and the Federal Reserve board will be in deep trouble–they will have managed to turn an already forecasted major recession into a horrible depression, possibly worse than te 1970s and moving into Great Depression territory.
Filed under: Commentary, Economics, Politics | Tagged: Federal Reserve
Thanks for writing such a concise overview of our nation’s economic situation. I’d like to augment what you’ve offered however, by discussing a particularly relevant, though typically overlooked ‘assumption’ underwriting central banking’s approach or methodology.
Soon after the ‘housing bubble’ burst this last summer, the topic of ‘moral hazard’ seemed to arise in relation to the FED. As Gary North defined it in an article published in August entitled, “The Moral Hazard of Central Banking”, ‘moral hazard’ occurs when central banks intervene “to save specific industries, i.e., too-big-to-fail industries.”
In other words, the central bank cites the theoretical assumption of ‘moral hazard’ to justify the imposition of action which attempts to affect outcome by circumventing the natural (economic) order of ’cause and effect’. This approach is aptly named because it entails denying a (natural) implicit order while simultaneously exerting authority further empowering the autocracy’s right to ‘play God’.
It’s pathetic how long it took Bernanke to lower the rates, he pretty much sent our economy into a recession. We need to have the Fed be more active in preventing a recession, and less concerned about unimportant inflation. I found a petition which is telling this all to Bernanke.
http://petitionearth.com/viewpetition.php?id=66
We need to make a statement, we can’t have the Fed destroy our economy.