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Friday, May 08, 2009

What we have is a mismatch between capital structure and consumer demand

The problem, therefore, isn’t that we lack enough “spending” or “demand,” and that we need government to fill in the “missing demand.” The problem is that in the wake of Fed-induced misallocations of resources we wind up with structural imbalances, a mismatch between the capital structure and consumer demand. The recession is the period in which the economy repairs this mismatch by reallocating resources into lines of production that actually correspond to consumer demand. The modern preoccupation with levels of spending instead of patterns of spending obscures the most important aspects of the question.

Had the market been allowed to work before the collapse, there would have been no housing bubble and no crisis in the first place. Had the market been allowed to work when the crisis hit, recovery would have been swift – as it was in 1920–21, when an even worse depression came to a rapid end without any open-market operations by the Fed, and without any fiscal stimulus. (In fact, the federal budget was cut in half from 1920 to 1922.)

What, in short, should we do now? Exactly the opposite of what our so-called experts, who in a sane world would be forever discredited, urge upon us.

-- from "No, the Free Market Did Not Cause the Financial Crisis" by Thomas E. Woods, Jr. at http://www.lewrockwell.com/woods/woods111.html.

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