My macroeconomics teacher is at it again. He claimed that World War II got us out of the Great Depression and concluded that only government spending or an increase in aggregate demand--through macroeconomic policies--can get us out of recessions. In other words, the very entity that created the incentive structure that caused the Great Depression, and could actually do something about it but did nothing, is the only entity that can ameliorate the situation (The FED). Furthermore, the massive spending on FDRs New Deal wasnt sufficient? Only World War II spending could have gotten us out of the Great Depression? What this professor seems to ignore is the shift of spending on New Deal programs to the war effort. The New Deal/government spending only perpetuated the Great Depression. It happened initially because the incentives or moral hazard problem created by the FED, caused banks to give out riskier loans knowing that a liquidity crisis would be mitigated by the central bank providing them with cash in case of a run. That never happened. Previously, banks used to work in conjunction with one another to prevent or mitigate bank runs. This is what happened in every banking crisis prior to 1913 (1907 is an example). We got out of the Great Depression despite the war spending, the economy couldnt survive the previous mass redistribution, capital misallocation and incentive structure created under FDR and his usurpatory Supreme Court of the 30s. The problem is the FED, bureaucrats and politicians, think they can somehow manipulate the economy and create a stable atmosphere for economic transactions. When in fact, every banking crises we have had throughout our history has been a failure of government on one level or another (unit banking vs. branch banking prior to 1913). Prices best allocate resources in a market economy and when the government distorts or perverts these prices through deviations in the nominal interest rate, it distorts the mechanism that most efficiently allocates said resources. In short, our business cycle is caused by the FED or intervention by planners, not by the free market. Do you think our business cycles would be so severe without the FED or other government intervention? WR
Posted on: Fri, 14 Nov 2014 00:03:29 +0000
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