Prolonging and Deepening the Recession

On the Mises Institute's blog Mr. Jeffrey Tucker quotes F.A. Hayek from the newly reissued book Prices and Production [Buy It | Download It]:

“Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion. ... To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection--a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end. ...It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression. We must not forget that, for the last six or eight years, monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.”

(Next month I plan to buy and read Hayek's book.)

The fear that the world as we have known it will completely end if it is not for government bailouts (a.k.a. "welfare for the rich") is ridiculous, even if we assume the very worst. Under the assumption of the very worst, so to speak, it is especially essential and vital that the market allow the failures to take place and to then allow the market to readjust to reality.

That the government, its left-neocon bodyguards, and those who are at the receiving end of the bailouts paint such a picture should not be surprising. All that needs to explain this is that they gain at the expense of the public at large by painting this "world-is-going-to-end" picture. To be sure, this doomsday rhetoric is very common among the statist establishment. Just recall the pictures that were painted by those who demanded a "preemptive" war with Iraq.

However, as great economists like Murray Rothbard have shown, by not allowing the market to readjust to reality, which requires a non-interventionist government policy, it will take that much longer for reality to set in. The economic crisis will thus be deeper and longer than it otherwise would be if the current statist ideas succeed. Since the artificial "boom" resulted in massive misallocations in various temporally unsustainable lines of production, the "bust" must be allowed to happen. (That, in fact, is a "good" thing.) Trying to hold together all of these various bubbles (which were all created by the government) or, worse, trying to inflate them to a larger size is going to only delay the inevitable. It will make that inevitable result only worse. The unsound must be allowed to fall and the sound must be allowed to rise. Resources, capital, and labor must be able to move accordingly. Therefore if one was to ridiculously assume the very, very worst possible ("the world is going to end"), it would only be prudent, and even more so in this case, to let the market readjust and liquidate what it needs to liquidate. The worst thing to do is to follow what Hoover and FDR did. Doing that would truly create a crisis of gloom and doom.

Indeed, if Hoover copied what occurred in the depression of 1920-1921, the economic crash that occurred in 1929 would have ended swiftly. There would have been no Great Depression, which lasted a full decade. The crash in 1920 was by all statistics worse than the first year of the Great Depression and, despite this, it ended very fast. Why? The government did nothing. Notwithstanding the historically erroneous idea that Hoover was a "free market" guy, Hoover instead interfered with the market's adjustment process, and such interference only continued and intensified with FDR.

'We' better not make the same mistake. ...Though I fear that we will.