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May 14, 2007

How the Fed Causes Recessions
by Gerard Jackson

It is taken for granted that the US will go into recession on the grounds that the boom-bush cycle is an inherent part of the free market. (Democrats and their lying media mates are fervently praying that the next recession will happen on Bush's watch). Now that Greenspan has retired and Bernanke heads the reserve most commentators expect that it will be business as usual. Unfortunately they are right. Bernanke made that clear a while ago with a supportive comment about the "price rule".

Commentators are relieved at the apparent ease at which Bernanke's slipped into Greenspan's shoes. In order to see what is seriously wrong here we need to re-examine Greenspan's record. In my opinion his performance is still being grossly overrated an economic commentariat that should know better. It needs to be understood that Greenspan and the rest of the Fed, including Bernanke, subscribe to the dangerous price rule concept, according to which inflation is defined as too much money chasing too few goods.

Hence, match monetary growth with output and this will stabilise prices and thus the economy. Minor rises in the CPI of 2 per cent or so are considered of little importance. It follows from the rule that falling prices are defined as too little money chasing too many goods and that this situation would be deflationary. Unfortunately, this rule is a dangerous recipe for recession: a fact that I suspect Greenspan, no matter how dimly, is aware of. Perhaps he still recalls that during the 1920s the likes of Fisher, Keynes and Sir Ralph Hawtrey interpreted America's 'stable price level' as evidence that the economy was on a steady growth path and immune to recession.

It was only a few dissenters like Benjamin M. Anderson, Ludwig von Mises and Frederich von Hayek, sneeringly referred to as old fashioned "qualitative economists", who pointed out that these so-called stable prices were concealing enormous "imbalances" created by excess credit, and that these "imbalances" would eventually have to be liquidated once the economy went into an unavoidable recession. It was pointed out later on in the depression that the current

...difficulties are viewed largely as the inevitable aftermath of the world's greatest experiment with a "managed currency" within the gold standard, and, incidentally, should provide interesting material for consideration by those advocates of a managed currency which lacks the saving checks of a gold standard to bring to light excesses of zeal and errors of judgment. (C. A. Phillips, T. F. McManus and R. W. Nelson, Banking and the Business Cycle, Macmillan and Company 1937, p. 56).

The cruel irony is that though the "qualitative economists" were vindicated by subsequent events their Cassandra-like warnings were virtually lost to history while the free market got the blame for the Great Depression. The point that needs to be emphasised is that Greenspan was fully aware of the economic debate that waxed and waned during the 1920s and 1930s and may even have been influenced to some extent by the "qualitative" approach. (Alan Greenspan, Gold and Economic Freedom in Ayn Rand Capitalism: The Unknown Ideal, New American Library, 1967).

This might, I think, help to explain the number of references he made to imbalances when he expressed concern about growth in consumer spending, despite an apparently benign CPI. His refusal to comment on the possibility of a soft-landing also suggests that he knew a recession was on the horizon.

The problem today, as always, is that nothing has been learnt from history. Monetary policy is loose and the price rule still rules. In other words, another recession is on the cards. It's only a question of time. One thing is also certain: the public will never get the facts from America's phony media which is now no better than a branch of the Democrat Party.

Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes economics editor.

Copyright © 2005-2008 Gerard Jackson

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