As the economy goes from bad to worse, economists and politicians are pinpointing the reasons for the decline’s causes. The mainstream has pointed its finger on the apparent lack of regulation, and therefore calls for an increase in regulation on lending for the purpose of selling houses. Logically, if lenders were irrational enough to extend credit to those they knew could not afford said credit, then they must be regulated from doing so. But, although the reasoning is sound, the premise is not. It is illogical to assume that an aggregate amount of credit lenders made the same absurd mistake to lend to those which could not afford the credit without some underlying reason to do so (besides a supposed market-wide irrationality). These types of accusations and the regulatory decisions which come from them, which ultimately are a burden on the people’s liberty, will ultimately do more harm than good. When the time comes to recover, after the economy has bottomed out (and, admittedly, we are a long ways from that), these regulations will make the accumulation of wealth that much more difficult. What is necessary is accurately pinpoint the exact causes of the recession and then deregulate the economy to allow the free market to take its course. Otherwise, not only is the government going to make the situation worse than it already is, but it will guarantee that it will remain a recurring situation.
The reasons for bursting bubbles, or recessions and depressions, have already been explained by a great many articles and research papers. The Austrian theory of the business cycle, by far, makes the most sense—Austrian economists were able to warn of the impending credit bubble since as early as 2002 and 2003. In a credit market, interest rates (or the price to take the loan) decrease with an increase in loanable funds. This increase can come in two ways: either through an increase in savings, or artificially, through an increase in the amount of money in the market. In the past decade, the United States
has had some of the lowest savings rate in its history, and so an increase in savings does not explain the radical decrease in interest rates during the 2000s. A massive expansion of credit, on the other hand, does. The only institutions which have the ability to create money are the Federal Reserve and banks which practice in fractional reserve banking—only the Federal Reserve, as lender-of-last-resort, can make fractional reserve banking viable.
The problem is that in a free market economy, where a decrease in interest rates is catalyzed by an increase in savings, the businessmen who invest have these pool of savings to tap into when their final product is manufactured (the production of the final product is triggered by a decrease in the rate of savings, signaling that the consumer is looking to increase demand). In the event of a credit bubble this pool of savings does not exist, and so the end product cannot be purchased, because the consumer cannot afford it. That is where the bubble stems from—credit expansion gave the illusion of wealth, but ultimately crumbles upon itself.
It is illogical to assume that the problem lies within the lack of regulation of lenders. They were, in fact, regulated. They were regulated to the point where the government provided incentives, and in certain events forced bankers, to loan to those who could otherwise not afford to take the loan. Or, the loan regulating agencies—all of which are government-sponsored—purposefully overlooked loans which otherwise would have not been allowed. The lack of regulation on the greedy bankers was obviously not the problem. It is illogical to assume that the aggregate of bankers would all be interested in selling loans to poor families in an attempt to make more money, knowing full well that those families could otherwise not afford to pay the credit back. The theory is nonsensical, because from the start it is obvious that the credit will be lost. And so, the theory that greedy bankers caused the recession should be immediately abandoned, because it holds no water.
This alone should be enough reason to rescind regulation on the banking community. But, there are other reasons—including risking stifling any incentive to invest, and therefore severing the heads of possible business ventures which could otherwise “stimulate” the economy. It is ironic that the government has called for an increase in regulation, despite the fact that the government has also criticized banks for not lending out “excess reserves” due to distrust between banks and its potential clients. The government is acting like a two-faced manager. On the one hand, it calls for greater regulation of the banking industry. On the other, it chastises the banking industry for being too cautious. Which one is it? It should be obvious by now that the government really has no idea on what it needs to do to protect its citizens from poverty—and, it has become more and more obvious that this recent failure has not been a failure of the market, but one of government and economic centralization. It happened to the United States in 1929, and several points in time thereafter, and it destroyed the Soviet Union in 1991—now, economic central planning is taking its toll on the United States. And to solve this problem, the government purports to centralize economic planning even further.
The key to restoring prosperity does not come through regulation, and it does not come through government spending, or inflation. All of these three prior “solutions” will only lead to a worsening crisis and the confiscation of the entire nation’s private wealth. There have been plenty of real life examples to warn of these outcomes. For example, Tom Palmer illustrated the case of Argentina, whereas the Argentine people’s savings were confiscated through inflation by the Argentine central bank. It was former Chairman of the Federal Reserve, Alan Greenspan—who also radically increased the money supply under his tenure—, who argued against this same phenomenon. The key to restoring prosperity is to diminish the size of government and return the people of the United States to a society with a semblance of liberty. It is deregulation and the abolishing of the Federal Reserve, and a return to true free banking.
It is this latter case which makes the most sense. Within cries of greater regulation, nobody stops to look at one of the main causes for the lack of moral hazard. Apart from why banks conducted reckless banking, the other important question is what causes them from thinking twice about doing it again? Regulation? It was the Federal Reserve which bailed out the banking industry by inflating their reserves, eliminating this moral hazard. I am sure that after a bank went bankrupt due to poor fiscal policies, other bankers would not repeat the same series of events which led to the bankruptcy. That is, by far, the most efficient form of regulation.
Instead, we are witnessing an era of lack of responsibility. The government and its sponsored enterprises—such as the Federal Reserve—are bailing out those who failed to do their job (or were misled by the illusion of wealth created by the Federal Reserve), protecting them from the real outcome that their actions should have led to. Instead, the government is punishing the rest, by threatening their private property rights. These rights are threatened by the disallowance of free entrepreneurship, stifling innovation and investment, and through taxation. In the long-run, we are destined to a period of severe economic decline. Until we vote in a government which decreases its burden and which respects private property rights, we are condemned to a road to serfdom. In the 1930s and 1940s, it took a world war which claimed the lives of tens of millions to get to that point—I shudder at the thought of what it will take this time.
