Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

Preface to the Second English Editionxxvinflation and to inject all the liquidity necessary into the financialsystem to prevent its collapse). Thus, one day the FederalReserve rescues Bear Stearns (and later AIG, Fannie Mae, andFreddie Mac or Citigroup), and the next it allows LehmanBrothers to fail, under the amply justified pretext of “teachinga lesson” and refusing to fuel moral hazard. Then, in light ofthe way events were unfolding, a 700-billion-dollar plan topurchase the euphemistically named “toxic” or “illiquid” (i.e.,worthless) assets from the banking system was approved. Ifthe plan is financed by taxes (and not more inflation), it willmean a heavy tax burden on households, precisely when theyare least able to bear it. Finally, in view of doubts aboutwhether such a plan could have any effect, the choice wasmade to inject public money directly into banks, and even to“guarantee” the total amount of their deposits, decreasinginterest rates to almost zero percent.In comparison, the economies of the European Union are ina somewhat less poor state (if we do not consider the expansionaryeffect of the policy of deliberately depreciating the dollar, andthe relatively greater European rigidities, particularly in the labormarket, which tend to make recessions in Europe longer andmore painful). The expansionary policy of the European CentralBank, though not free of grave errors, has been somewhat lessirresponsible than that of the Federal Reserve. Furthermore, fulfillmentof the convergence criteria involved at the time a healthyand significant rehabilitation of the chief European economies.Only the countries on the periphery, like Ireland and particularlySpain, were immersed in considerable credit expansion from thetime they initiated their processes of convergence. The case ofSpain is paradigmatic. The Spanish economy underwent an economicboom which, in part, was due to real causes (liberalizingstructural reforms which originated with José María Aznar’sadministration in 1996). Nevertheless, the boom was also largelyfueled by an artificial expansion of money and credit, whichgrew at a rate nearly three times that of the correspondingrates in France and Germany. Spanish economic agents essentiallyinterpreted the decrease in interest rates which resultedfrom the convergence process in the easy-money terms traditionalin Spain: a greater availability of easy money and mass