Key quote:
"The federal debt of some $5.5 trillion would be inconceivable in an unhampered market order functioning smoothly with commodity money. The classical gold standard would have been an insurmountable obstacle to such heedless spending of the people's savings. This is why politicians and officials passionately disparage and decry it as a relic of the distant past. Their deus ex machina which resolves any financial difficulty is the Fed. "
The Greenspan Myth
by Hans F. Sennholz
[posted April 5, 2001]
Ever since the ominous fall in stock prices and the economic slowdown in recent months many Greenspan fans have turned into bitter critics who censure the master for having hiked interest rates unnecessarily in 2000. Millions of investors have lost most of their savings in only twelve months as four trillion dollars in wealth vanished when Nasdaq prices fell by 70 percent, 80 percent, even 90 percent.
They now fault the Fed for not having lowered the rates quickly and sizably since the downturn came in sight. "The Fed is asleep at the wheel," they are moaning. They are clamoring for big interest rate cuts "in order to save the economy." The loud hustle and bustle for lower interest rates do not diminish the cult of the Fed.
All eyes continue to be on the Fed. If only its critics could hold and wield its controls, they would slash the rates which would revive the economy. At least, that is the talk of today, the explanation given by nearly every analyst, fund manager, and news commentator.
A few economists of the Austrian School view the Greenspan Fed in an entirely different light. They perceive it as the very cause of instability and not the solution. They fault it for having fostered the biggest and longest bull market in history, the most speculative market with the greatest public participation, the largest volume of trade and the greatest overvaluation of corporate stocks. And they censure it for laboring to avert corrections and readjustments. While public opinion applauds the Fed for averting the financial crises, these economists deplore all such Fed efforts for being counterproductive, aggravating, and prolonging the readjustment pains. Booms and recessions do not spring from the nature of the market order, they contend.
Central banks and many financial institutions with central-bank backing and support create them by issuing fiat money and credit which falsify interest rates and distort the market structure. Low-interest fiat credit in particular misleads producers in their entrepreneurial decisions. Led astray, many embark upon uneconomic construction which in time is bound to inflict losses. When many businesses expunge the losses through correction and contraction we speak of a recession. The projects that looked so promising during the boom must now be written off as entrepreneurial errors.
(cont)
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