The media pundits are shocked! The politicians are slack-jawed. What can we do? Our financial system is in tatters! We’re in a housing crisis, a recession, or a depression, depending on which term you prefer. Credit has dried up for all but the squeaky cleanest of borrowers! How could this be possible? After all, here in the good ol’ U.S. of A. we have this wonderful institution called the Federal Reserve that’s supposed to keep the financial system safe from all of those power mad, greedy capitalists who supposedly ruin the good times for everyone. Well, the whole mess can be summed up with two words: credit expansion.
From USAGold.com we see this statement concerning the central banks actions in the aftermath of the September 11 attacks : “The Fed moved aggressively to supply credit and lower interest rates in an effort to resurrect the markets and keep the economy out of recession.”
And from NPR: “Federal Reserve officials kept interest rates artificially low after the Sept. 11, 2001, terrorist attacks and that helped create the housing bubble.”
Even CNBC’s ranting establishment money man, Jim Cramer had harsh words for the Fed when he railed that, “The Federal Reserve created the stock bubble with low margin rates and it created the housing bubble with low mortgage rates, yet I never hear about anyone talking about investigating the Fed,”
And from Robert P. Murphy and Lee Hoskins on Forbes.com: “A good portion of the housing mess itself is the result of Fed policy: In response to the 2000-2001 recession, chairman Alan Greenspan brought the federal funds rate down to a shocking 1% by June 2003, then held it there for a full year.”
Those are just a few comments. However, they illustrate the dangers that are involved when the Fed slashes interest rates below the normal market level in an effort to expand credit and lead people to believe that prosperity can be created out of thin air. The Austrian economists, however, recognized the dangers of reckless credit expansion many years ago. Here a few comments from Ludwig von Mises on this subject. They are all taken from his book Human Action , which was published in 1949.
“The essence of a credit-expansion boom is not overinvestment, but investment in wrong lines, i.e., malinvestment.”
“What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit boom is built on the sands of banknotes and deposits. It must collapse.”
“If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders.”
“The final outcome of the credit expansion is general impoverishment.”
“Credit expansion is the governments’ foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous.”
These quotations, and many others on various topics and issues are compiled in The Quotable Mises, edited by Mark Thornton.
Freedom * Prosperity * Peace 