Thursday, August 6, 2009

The Fed’s Phlogiston Theory of Recessions
By William Anderson
Published 08/06/09

"The truth is much darker. The "Keynesian-Phlogiston" theory lives on not because it is logical or even sound; no, it dominates the political economy because it permits the very people who have touched off the unsustainable boom to pose as the Saviors of the Economy. Ben Bernanke really has become the arsonist who shows up dressed as a firefighter so he can be the Big Hero and put out the fire that he started.

However, instead of pouring water or something that would stop the economic fire from spreading, Bernanke and the U.S. Government have thrown hi-test gasoline on the flames. While the Fed claims it simply is "providing liquidity" (just as the arsonist "provides gasoline"), the real problem is that such policies only prolong the malinvestments and, thus, prolong the economic downturn and ultimately make it worse than it would have been had the government not intervened at all."