In a recent article, we explained how central banking wrecks the economy over and over again with its interventionist monetary policy. The Fed tinkers with interest rates and drives boom-bust cycles. But government also has a role to play in this drama. The policies pushed by politicians and bureaucrats help determine where malinvestments will show up in the economy.
The unholy alliance of central bankers, politicians and government functionaries always ends in economic chaos.
In the years leading up to the 2008 crash, the government tried to turn every American into a homeowner. Needless to say – it didn’t end well. This should serve as a warning for the current batch of politicians and bureaucrats. Sadly, it probably won’t.
A recent Paul Krugman New York Times column praised the success of the Keynesian macro model in the wake of the 2008 financial crisis. In his view, the Federal Reserve did exactly what was necessary – pushed interest rates to zero and launched rounds of quantitative easing to jumpstart demand. As Tom Woods and Bob Murphy put it in a recent episode of the Contra Krugman podcast, “we agree that Krugman’s model did great…if we overlook all the times it blew up in his face.”
As is typical of Keynesians, Krugman ignores the side-effects of Federal Reserve policy. It works for a while, but it perpetuates the boom-bust business cycle. Sure, the economy today seems to be booming, but there is a rotten underbelly that most everybody in the mainstream seems to be ignoring. Peter Schmidt offers a succinct breakdown of Keynesian-based Fed policy and reveals why its doomed to failure.