A trillion here, 500 billion there – it seems no amount is too much when the authorities want to fix a perforated economy. Keeping an economy on life support through extensive intervention has been the typical reaction to a crisis since elements of Keynesianism were applied for the first time during the Great Depression. Yet such Keynesian initiatives cannot be enacted without “big bank and big government” (Minsky); in other words, a reactive central bank and interventionist government.
I will use the Federal Reserve as a case in point as it is a relatively new institution. Interestingly, the US survived until 1913 without a central bank and enjoyed robust growth. Since then the Fed has essentially failed in its objectives of ensuring monetary and financial stability. Interest rates have fluctuated between zero and 21 per cent, prices have continued to rise, and financial crises have been frequent.
Vigorous booms in the US are generally characterised by an artificial expansion of credit followed by a proportionately vigorous bust (the more unremarkable recessions of yesteryear, although more frequent, tended to be shallower). Recessions or depressions that have corresponded to central bank manipulations have produced substantial shifts in the economic sub-structure – we have seen multiple sectors of the economy suffer in the current crisis. In the past, business cycles were just that. Their cyclical configuration led to redundant institutions being liquidated and growth continuing again. Since the Great Depression, however, this kind of cycle has in effect been prohibited though big government and big bank initiatives. But when a boom and bust has happened, it has had much deeper effects on the whole economy.
As the Federal Reserve has tried to prevent recessions, economic growth on average has slowed. While there may be many reasons for this, the assumption that central banks bring both stability and growth is questionable. Indeed, it could be argued that the attempted suppression of the business cycle has been a source of weakness to the US economy.
Growth and innovation can occur without the impetus of artificial credit. It is saving and production, not debt and consumption, that drive economic development. The recent boom was based on the illusion that property appreciation and consumption, rather than production and savings, are the path to growth and prosperity.