Leftist Mike Whitney has written an interesting article here on the Fed's role in the Bear Stearns meltdown. He concludes his essay by quoting Ron Paul who"summed it up best when he said":

"From the Great Depression, to the stagflation of the seventies, to the burst of the dot.com bubble; every economic downturn suffered by the country over the last 80 years can be traced to Federal Reserve policy. The Fed has followed a consistent policy of flooding the economy with easy money, leading to a misallocation of resources and artificial 'boom' followed by recession or depression when the Fed-created bubble bursts."

It's too bad some"free market" economists have no understanding of what's happening. Perhaps they should read Counterpunch and learn something.

Bill Woolsey - 7/2/2007

When I first read Brady's post, I thought that he was correct to argue that many free market economists reject the Austrian theory of the Business Cycle. When I glanced at the quote from his leftist, it seemed to me consistent with a more common view that recessions have been the fault of the Federal Reserve in ways not closely related excessively low interest rates, malinvestment, and the like. I just assumed that if I went ahead and read what the leftist had written in detail, I would see that his theory of Fed failure was closer to that of Mises/Rothbard than the more monetarist approach to monetary disequilibrium.

And while I would like to forget real business cycle theory, there are certainly some free market economists who believe that recessions are not the fault of the Fed, and furthermore and optimal responses to changes in technology and preferences.. right? Don't some people really believe that? And aren't they generally free market oriented?

Brady's most recent claim, that there are many free market economists who don't understand that increases in the money supply lead to a decrease in the purchasing power of money--well, that is pretty much incredible. I would go further, and argue that the consensus in the mainstream is now that changes in the money supply are positively related to the price level. I think there was always a lot of support for that view in the mainstream, though many leading mainstream economists emphasized special cases where it might not be true in order to promote their prefered policy--descretionary fiscal policy along the lines introduced by Keynes.

It seems to me, however, that there is less support for price level stability than before. And even less sympathy towards mild deflation.

I particularly have in mind free market economists like Alan Greenspan and Ben Bernanke.

Mark Brady - 7/1/2007

I think it would be fair to say that most economists and economic commentators who describe themselves as favoring free markets have little or no idea of how credit expansion under the aegis of a central bank distorts price signals and creates artificial booms and the inevitable recessions that follow. Indeed, it seems that many don't have very much appreciation of how monetary expansion leads to a fall in the purchasing power of money.

Steven Horwitz - 7/1/2007

Which free market economists would those be Mark? What exactly do they not understand about what's happening?

Seriously. I don't know to whom you refer here, nor which element of the argument they are missing.