Thursday, August 18, 2011

Recessions are Necessary, but The Federal Reserve Makes Them Worse

In 1921, there was a recession.  It was a painful recession.  Most people forget about that recession, even though it was one of the worst we had.

This recession only lasted a year.  Why did it only last a year?  The Federal Reserve did something different then than it would do today:  They raised interest rates.  The government reduced size at this time, preventing much meddling.  The market's volatile assets were cleared within about a year's time, and the recession ended, pushing the United States into a Golden Age.

During the Great Depression, interest rates were lowered, and the government increased in size HUGELY.  The Great Depression was not ended until World War II compelled industry and job creation... and created 16 million jobs when soldiers went off to fight and die for their country.  It's a curious thing, that larger government and lower interest rates actually prolong a recession, yet that is exactly what is occurring with the Fed and the United States government right now.

By ending the Federal Reserve, or at least changing its policies to advocate higher interest rates in times of recession, the economy CAN recover before the upcoming Bond Bubble bursts.  If we do not fix the economy by then, we will be sent through a second recession.  That cannot happen.