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Friday, June 10, 2005

Economic Intervention is Not the Only Choice

Neither Republicans nor Democrats really believe in individual freedom and the working of the free market place.

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In a Page One article in the June 9th edition of The Wall Street Journal, titled “In Treating U.S. After Bubble, Fed Helped Create New Threats,” reporter Greg Ip writes:

“Faced with an asset bubble, a central bank has two choices: Prick it early or wait for it to burst and try to contain the damage. The Fed in 1929 and the Bank of Japan in 1989 tried the first route, raising interest rates in response to rapidly rising asset prices. The result in the U.S. in the 1930s was depression and deflation. In Japan it was stagnation and deflation that continues today.”

Clearly there is a third, and preferable choice: stand back and let market forces correct the problem without governmental intervention.

If we are to credit economist Murray Rothbard’s magisterial “America’s Great Depression” (and I do), it was not the Fed’s tightening of credit after 1929 that plunged the nation into the Depression.  It was the Fed’s flooding the market with credit during the 1920s to finance production of machinery for export to Germany, where it was needed to rebuild the war-ravaged economy. 

The conditions producing the Depression, as many people noted at the end of Bill Clinton’s tenure, were remarkably similar to the dot.com boom.  In both, capital markets awash in funds led to vast over-investment in basic capacities: machinery production in the 1920s, fiber-optical cable and internet companies in the 1990s.

In retrospect it is clear that, had first president Hoover, then President Roosevelt, not intervened in the market by attempting artificially to prop up wages and to create new government lending vehicles and price support mechanisms, the correction after 1929 would have been severe, but short.  President Roosevelt’s New Deal managed the unprecedented feat of stretching a recession into twelve bitter years of travail that ended only after the start of mobilization for World War II.

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Posted by Thomas E. Brewton on 06/10 at 01:49 AM
Economics • (0) Comments
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