From: msmith01@flash.net
Subject: SNET: Fed mistake transformed United States
Date: 29 Mar 2001 11:21:55 -0500
To: Mark 

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http://www.townhall.com/columnists/paulcraigroberts/pcr20010329.shtml


Paul Craig Roberts (archive)
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March 29, 2001

Fed mistake transformed United States

        The long Reagan expansion was a casualty of the Y2K scare. The
        Federal Reserve, thinking that Americans would withdraw a
tremendous amount of cash to protect themselves against computer
crashes, added excess liquidity during 1999. But Americans did not hoard
cash. Consequently, the liquidity found its way into stock prices.

With the smooth transition to the year 2000, the Fed realized that it
had made a policy mistake by pumping up the monetary base to
inflationary levels. Reacting to its own prior miscalculation, the Fed
withdrew the excess liquidity. The result was higher interest rates and
lower stock prices.

When the Fed takes money out of the economy, it depresses economic
activity, just as adding money can put a head of steam on a boom. The
price of the Fed's Y2K mistake is a slowdown and, most likely, a
recession.

Ever since the Fed was created, the Fed's mistakes have been the main
cause of recessions and inflations. The Fed's first mistake was a huge
one -- the Great Depression. In the early 1930s the Fed misinterpreted
the reasons for the stock market crash and the behavior of banks.

The Fed thought that too much liquidity had driven up stock prices to
unsustainable levels, and the Fed misjudged the reason banks accumulated
excess reserves in the aftermath of the crash. Fearful of panics that
caused runs on banks, bankers hoarded cash in order to be able to
weather a run on the bank by scared depositors demanding cash. The Fed
misinterpreted the excess reserves as a sign of too much liquidity in
the banking system.

One Fed mistake led to another. The end result was a dramatic reduction
by 33 percent in the supply of money. Purchasing power, prices and
employment all collapsed.

The consequence of the Great Depression was the New Deal -- essentially
the abandonment of the American constitutional system of limited
government and accountable law. The depression was taken as evidence
that the "old order" had failed and that a new activist and
paternalistic central government had to take its place. The entire
transformation of the U.S. constitutional order is due to the Federal
Reserve's monetary mistake.

One important reason that liberal Democrats and "moderate" Republicans
oppose tax cuts is that tax cuts are seen as a move away from activist
government back toward what liberals believe is the depression-prone
"old order." Progressives see tax cuts as atavistic policy, a throwback
to the past.

The benefit to the economy of a tax rate reduction means little to
people who believe that we need more government, not less. This is the
reason liberals remain unmoved by arguments showing the efficacy of tax
cuts. A tax cut may get the economy going, but it is the wrong kind of
economy.

For liberals, the right kind of economy is one in which government has
the money to attend to people's old age retirement, health care,
education, child care and welfare, and to regulate the work place, the
medicines people take, the design and manufacture of the products they
consume and, increasingly, their use of language.

The argument for tax cuts is an argument for more individual
responsibility. A tax cut implies that the money people earn belongs to
them, not to some collective need. A tax cut is an argument for freedom.

Many Republicans are uncomfortable making such an argument, because the
New Deal redefined freedom to mean freedom from want. The old freedom
meant that a person was free to succeed or fail, and if the latter, to
be in want.

The New Deal has slowly altered the American character, accustoming
people to trade off freedom for security, much like free men after the
fall of Rome became serfs in exchange for military protection. Most
Americans now take for granted that someone else is supposed to look
after their retirement and pay their doctor and medical prescriptions.
Millions of Americans rely on someone else to pay their rent and grocery
bills.

A tax cut would boost economic growth. More importantly, a tax cut would
boost the inclination and ability of Americans to stand on their own
feet -- the only feet on which a free people should stand.

©2001 Creators Syndicate, Inc.




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