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

Additional Considerations on the Theory of the Business Cycle 499consequence of Spain’s entrance into the European EconomicCommunity. Moreover the recession hit within a contextof an overvalued peseta, which had to be devalued onthree consecutive occasions over a period of twelve months.The stock market was seriously affected, and well-knownfinancial and bank crises arose in an environment of speculationand get-rich-quick schemes. It has taken several years forSpain to recover entirely from these events. Even today, Spanishauthorities have yet to adopt all necessary measures toincrease the flexibility of the economy, specifically the labormarket. Together with a prudent monetary policy and adecrease in public spending and the government deficit, suchmeasures are essential to the speedy consolidation of a stable,sustained recovery process in Spain. 110 Finally, following thegreat Asian economic crisis of 1997, the Federal Reserveorchestrated an expansion of credit in the United States (andthroughout the world) which gave rise to an intense boomand stock-market bubble. At this time (late 2001), it appearsthis situation will very probably end in a stock-market crash(already evident for stocks in the so-called “New Economy” ofelectronic commerce, new technologies and communications)and a new, deep, worldwide economic recession. 111110 We will not also go into the devastating effect of the economic andbank crisis in developing countries (for example, Venezuela), and on theeconomies of the former Eastern bloc (Russia, Albania, Latvia, Lithuania,the Czech Republic, Romania, etc.), which with great naivete andenthusiasm have raced down the path of unchecked credit expansion.As an example, in Lithuania at the end of 1995, following a period ofeuphoria, a bank crisis erupted and led to the closure of sixteen of thetwenty-eight existing banks, the sudden tightening of credit, a drop ininvestment, and unemployment and popular malaise. The same can besaid for the rest of the cases mentioned (in many of them the crisis haseven been more severe).111 As explained in the Preface, when the first English edition of thisbook was prepared (2002–2003), a worldwide economic recession wassimultaneously affecting Japan, Germany, and (very probably) theUnited States. The deep financial crisis and economic recession whichbegan in 2007–2008 is explained in the Preface to the second English edition.