Baghdad is about to be overrun by terrorists; we have a crew of liars in the Administration; and the dollar is headed towards collapse. Let’s talk about the last, which is not in the headlines every day, but which is probably the worst of the three problems.
The situation is caused by government interference in the free market. Look at the latest manifestation of what is truly a huge and ongoing crisis: the collapse of the housing bubble. The housing bubble, recall, was actually sought after by our Keynesian economic betters like Paul Krugman, who said in 2002:
To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.
Yes, he really said that. Wish granted, Mr. Krugman. By artificially keeping interest rates low, the Fed spurred construction far beyond the market’s natural appetite. Banks rushed to provide demand to meet the supply, waiving normal loan requirements. CDOs were created to market the bad debt. All the while, banks felt secure, knowing that if (when) the bubble burst, the government would have their back. Fannie and Freddie had their wink-wink government guarantees, and the federal government and the Federal Reserve stood ready to provide billions to bail these institutions out and keep credit flowing.
But the Fed’s artificial lowering of interest rates started the whole trainwreck.
I’m reading a book in which the following insightful quote appears:
The market rate of interest provides crucial information for the smooth operation of the economy. A central bank setting interest rates is price-fixing and is a form of central economic planning. Price-fixing is a tool of socialism and destroys production. Central bankers, politicians, and bureaucrats can’t know what the proper rate should be. They lack the knowledge and are deceived by their own aggrandizement.
That quote is from a book called End the Fed. (Click through if you want to know who the author is.)
I intend to write more, as time permits, expanding on the concept of ending the Fed. I will explain the Austrian theory of the business cycle, and argue that this theory leads one to the conclusion that the Fed should be abolished. I’ll address the argument that the Fed smooths out recessions, explaining the causes of bank panics in the 1800s (hint: it’s almost always inflation created and/or aided by government policies). I’ll refute the idea that 18 recessions since the beginning of the Fed is a better track record than we had without a central bank. All that is for future posts.
But for now, just think about that quote. If you truly support the free market, you can’t support the Fed. You’re supporting price-fixing.
Let me know what you think.
P.S. I know: this is unlikely to happen right now. We’ll revisit the idea after the dollar collapses and see if you’ve changed your mind. Everything I am writing these days is geared towards the discussion we will have then.