Keynesian Economics is the worst thing to have ever been invented and implemented.
The Fed is to blame for every bubble and every bust. Manipulating interest rates feeds this cycle; keeping them artificially low for long periods of time floods the system with “cheap money,” which leads to over inflated asset bubbles, which invariably burst. Inflated government “fiscal stimulus” on top of this only adds fuel to the fire. All of this in the interest of reducing or avoiding economic pain.
Well, I have news for you. Pain is good. It teaches us. It makes us stronger. Children who touch hot stoves only do it once. The pain tells them that “it isn’t good to touch hot stoves.” Now imagine if they never learned that lesson, the pain having been removed by the application of a topical anesthetic. That kid is going to burn his hand off and never know it.
This is the exact thing that is happening in front of our own eyes, except we are going one step further. We are actually rewarding the kid for touching the stove, and encouraging him to do it again!
There is no pain felt by AIG for a lack of due diligence in investigating the likelihood of default on mortgages backed by credit default swaps. They are paying their people $100 million in previously negotiated bonuses, thanks to the Government putting taxpayer money on the line to bail them out.
There is no pain felt by Banks who were allowed to write bad loans to mortgage brokers and then turnaround to unload significant portions of their bad assets onto the Federal Government, Fanny and Freddie.
There is no pain felt by the mortgage brokers who told poor Americans that they could afford houses they had no business buying in the first place. They got their commissions and ran.
And the above 3 examples only cover the mortgage bubble/bust that most recently threw the global economy into a tailspin. Nevermind the telecom bubble and bust of the late 1990’s and early 2000’s – also brought to you by the federal government in the form of low interest rates and the Telecommunications Act of 1996. Nevermind the S&L bubble and bust of the late 80’s – thank you Mr. Greenspan for your great policy of cheap money (read – sarcasm).
I suppose the point I am trying to make is that markets are efficient at “turning the faucet on and off.” Government is not. Why? Because it is easy to get greedy. If some fiscal stimulus is good to get us out of the rough patch, surely more is better (read – sarcasm)!
If markets set interest rates, not the Fed, then rates would automatically go up before too many people use the cheap money to inflate the market. Economic growth, if charted, would look like a steady climb up and to the right as technology, education, standard of living, and population factors all have net positive effects on economic output.
I dare anyone to look at a chart of the Dow Jones and tell me it looks like what I described above. Keep in mind both the time scale and the logarithmic scale of this chart. Vast fortunes were wiped out in these seemingly minuscule pull-backs.
http://stockcharts.com/charts/historical/djia1900.html
What is in store for us in the future is hard to say, but for the NOW we are certainly paying for the excesses of the past. The solution is not more fiscal stimulus gasoline on the fire, but less (and a balanced budget to boot). The solution is not rewarding “too big to fail” companies for poor decision making, but to let them fail. The solution is not to keep interest rates so low that we inflate another asset class to bubble proportions, but to get rid of the Fed and their “experts” that got us into this mess.
The solution is a little bit of pain.
