Liberty Defined: 50 Essential Issues That Affect Our Freedom Read Online Free PDF

process along, mainly because there are so few things on which the two parties agree that would be good for the country.

Higgs, Robert. 1989.
Crisis and Leviathan: Critical Episodes in the Growth of American Government
. New York: Oxford University Press.
Rothbard, Murray. 2006.
For a New Liberty
. Auburn, AL: Mises Institute.

B USINESS CYCLE
     
    I n the midst of the “great recession” that began in earnest in 2008, there was no end to the talk about stimulus, yet hardly any talk about what causes recessions in the first place. The answer involves looking not at the downturn itself but at the structure of the preceding boom. Here is where the economic balance is tipped and production gets distorted. Rather than look at the recession as the disaster, we are better off looking at it as a period of healing following a false sense of prosperity generated by the boom times.
    So what causes these economic booms—periods in which productivity expands in some sectors far beyond what the economic fundamentals seem to justify? Here we can draw on the Austrian theory of the business cycle, which was first sketched by Ludwig von Mises in the early days of central banking. He wrote that the central bank posed a serious danger due to its ability to manipulate the interest rate. Because artificially low rates cause an expansion of the money supply, these invented rates are central to understanding what causes booms. Miseswrote in 1923: “The first condition of any monetary reform is to halt the printing presses.” 1
    The interest rate is a signal that tells bankers and businesses about the best times to expand production. When interest rates fall below their market rate, a false signal is sent out that there are more saved funds available for lending, so naturally, everyone starts to do more business and expand production. They feel they are getting a good deal. The mere process of simple lending acts to create new forms of money in the economy and thus create an economic boom. This boom is usually worsened by government promising bailouts to banks, loan guarantors, and enterprises, thereby encouraging bad investment and business by removing the fear of failure.
    The combination of these factors is precisely what led to the wild housing boom from the 1990s and forward that came crashing down in 2008. There was nothing particularly new in this except that this time it happened to affect housing. In previous times, it had affected the stock market, the dot-com market, the oil market, and other sectors, all the way back to when the Federal Reserve Bank was created in 1913. Of course there were business cycles before that time, but they were not as severe and not as widespread, precisely because banking was not as centrally controlled as it has since become. But even back then, people understood the dangers of credit creation by banks and the false signals that they send to producers.
    The problems of the business cycle are then exacerbated bythe attempt to prevent the bust from leveling out as the market would dictate. In other words, when a bust is looming, a frantic scrambling and even more artificial attempts to inflate the economy occur, which only worsens the inevitable correction. This tendency to use macroeconomic measures began under Herbert Hoover in 1930, a pattern that was continued by FDR. Hoover and FDR actually pushed the same agenda of high spending, attempted monetary expansion, controls on business, and efforts to keep wages high. FDR managed to take us farther down the road to serfdom only because he had longer in office.
    One might suppose that the incredible failures of those efforts to work as planned would have discredited countercyclical policy forever. One might suppose that the same failures of Japanese policies that led to a twenty-year recession in Japan would also discredit these efforts. But not so: Both the Bush and Obama administrations (just like Hoover and FDR) have attempted to stimulate the economy