Tuesday, October 21, 2008

Blame the Fed!

Want to know the proximate cause of the financial crisis? The accompanying graph shows what Greenspan's Fed did with with the Federal Funds Rate from 2002 to 2004: it's below 2% for the entire period. This "free money" policy was a necessary condition for the credit bubble, for without cheap credit, the wild borrowing would not have occured. In turn, housing prices wouldn't have been bid up. Greenspan may have whined about "froth," but he was running the eggbeaters.

As Ludwig von Mises warned us, inflationary monetary policy inevitably leads to a financial crackup. Compound easy credit with policies that encourage lower leading standards and favor consumpton over saving, and catastrophe is assured.

Now political entrepreneurs are trying to pretend this is all the fault of the free market. It's time for supporters of liberty to be ready for the fight of their lives. A key thing to remember in this fight: without artificially cheap credit, there'd not have been this orgy of irresponsible borrowing.

Blame the Fed!

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