Give Us Liberty by Dick Armey Read Free Book Online

Political pressure on the federal government’s central bank to keep the money flowing is standard operating procedure in the nation’s capital. Political jawboning for easy money knows no partisan divide. After the September 11 terrorist attacks, the Fed pursued an aggressive policy of money and credit expansion, eventually lowering its target rate from above 6 percent to 1 percent 2 .
    â€œToo many dollars were churned out 3 , year after year, for the economy to absorb; more credit was created than could be fruitfully utilized,” said economist Judy Shelton. “Some of it went into subprime mortgages, yes, but the monetary excess that fueled the most threatening ‘systemic risk’ bubble went into highly speculative financial derivatives that rode atop packaged, mortgage-backed securities until they dropped from exhaustion.”
    These mistakes were not inevitable, of course. And they were not unforeseen by sound economic thinking. The financial meltdown displayed all the characteristics of a classic government boom-and-bust business cycle generated by easy money and credit first described by Ludwig von Mises in the first half of the twentieth century. Mises was one of the leading proponents of the Austrian school of economics and had focused a substantial amount of his studies on business cycle theory.
    Mises himself knew something about the personal costs associated with sticking to principle. A respected classical liberal scholar 4 teaching in Vienna, Austria, he fled the rising tide of Nazi influence only to be largely ignored by leftist academia upon his arrival in the United States in 1940.
    Loose monetary policy, according to Mises, corrupted the standard of value, distorted relative prices, and encouraged systemic malinvestments. The mania of easy money and credit generated errors in economic calculations and investment decisions. “True,” said Mises, “governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse 5 soon or late and to bring about a depression.”
    The inevitable correction may be painful, but attempts by government to inject new money into the economy to repair the real economic pain caused by the boom-bust cycle leads to more sustained pain, inflation, and economic stagnation.
    Andy Laperriere, a financial markets analyst, raised these very concerns in the Wall Street Journal on March 21, 2007, a full year and a half before the crisis reached a boiling point. “Federal Reserve officials and most economists believe the problems in the subprime mortgage market will remain relatively contained,” he stated, “but there is compelling evidence that the failure of subprime loans may be the start of a painful unwinding of a housing bubble that was fueled by easy money and loose lending practices.” He warned:
    Asset bubbles are harmful for the same reason high inflation is: Both create misleading price signals that lead to a misallocation of economic resources and sow the seeds for an inevitable bust. The unwinding of today’s housing bubble is not merely an academic question; it is likely to inflict real hardship on millions of Americans.
    Ted Forstmann, a private equity pioneer, also foresaw the financial crisis in a July 5, 2008, Wall Street Journal interview. He pointed first to an increase in the money supply that changed the incentives of financial institutions. After making the same loans they normally would based on reasonable risk assessments and expected rates of return, banks “have tons of money left 6 . They have all this supply, and the, what I would call ‘legitimate’ demand—it’s probably not a good word—but where risk and reward are still in balance, has been satisfied.” So “they get to