F.A. Hayek won the Nobel Prize for showing how the central bank’s manipulation of interest rates – in other words, its intervention into the free market – leads to the boom-bust business cycle with which we are sadly familiar.
Even those who claim to support the free market see nothing amiss in a monopoly central bank with the monopoly power to create money out of thin air. They spend their time talking about what our Soviet commissar in charge of money and interest rates should do, instead of asking whether we need central planning of money and interest rates in the first place.
The housing bubble could not have arisen without the Federal Reserve. Had people started buying houses at unusually high rates, banks’ loanable funds would have begun to deplete, interest rates would have shot up, and that would have been the end of it. That would have discouraged any additional speculation in real estate. But Alan Greenspan and the Fed could create money out of thin air, thus giving the banks more to lend and driving interest rates down, thereby perpetuating the destructive bubble in housing.
In our country we have one group that believes you can print wealth into existence, another that tries to spend it into existence, and a third (and by far the largest) group that believes in both. This is a philosophy fit only for children and ignoramuses, and the editorial page of the New York Times – or perhaps I repeat myself.
Then there’s the fourth group: the grownups, who understand that wealth is created through saving, investment, and entrepreneurial skill; that wealth has to be produced before it can be consumed; and that lending is impossible in the absence of prior saving. Simple things, really, but if it weren’t for the constant denial of these elementary ideas, our talking heads would have nothing to do.
Today, we grownups have to explain these basic principles to the deranged children – as they run around with their fingers in their ears, and screaming "I can’t hear you!" – who run our government, write our opinion columns, and fill American airwaves with stupid and destructive economic advice.
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