The Free Press, Mankato, MN

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December 20, 2009

Your View: Government polices to blame for recession

Marcus Piepho, Mankato

We find ourselves in a recession with high unemployment and massive debt. In order to understand how we got into this mess we need to look at the Austrian theory of the business cycle.

In a true free market, which America doesn’t have, the interest rate is determined by the supply and demand for capital. Individuals choose to consume or invest, and this dictates the amount of loanable funds which businesses will use to undertake projects to bring goods to market for future consumption.

In this country we have a central bank, the Federal Reserve. The Fed prints money, artificially lowering the interest rate and expands the loanable pool of funds, leaves producers with a false price signal. The interest rate will tell producers that consumers want them to undertake long-term projects to bring goods to market. This artificially lowered rate will also induce consumers to save less and spend and borrow more.

The conflicting actions of consumers and producers in response to the government distorted price signal of the interest rate causes the mass misallocation of resources. This leads to the bust.

Logically, the government should stay out of the market and let the malinvestments liquidate, let the market correct the imbalances and distortions created during the artificial boom. Instead the government has undertaken programs to keep people in homes and cars that they cannot afford, bailed out failing enterprises, created make-work politically oriented, and wasteful public works projects, and increased the money supply at an alarming rate. These policies prevent any recovery.

History is repeating itself, with Bush and now Obama following Hoover and FDR’s favorite anti-depression prescriptions.

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