How Will Government Respond To The Next Fed-Created Bust?

By Chris Rossini

Ever since The Federal Reserve opened its unconstitutional doors, the American economy has been on a perpetual roller-coaster of "this time is different" booms, followed by heart-crushing financial busts.

It can be no other way. The Fed creates bubbles and the bubbles have to pop. It's not complicated.

This immoral cycle enriches the politically-connected few at the expense of everyone else, so it does serve a purpose for them. If everyone were to be harmed equally, there would be no point in having a Federal Reserve.

The Fed creates all the financial booms and busts. There's nothing we can do about that. But how government responds to those busts, we have a very small outside chance of influencing.

Even though voters have minimal influence on their so-called "representatives," it's not zero, so there's always a possibility for the right thing to be done when the next Fed bust occurs.

For example, most people have never heard of the bust of 1921. There's a very good reason for that. It was short. It was still a bone-crushing economic collapse, but it didn't last long.

The reason that it was a quick collapse was because of the policies of the president at the time -- Warren G. Harding.

It's probably safe to say that most Americans have never heard of Harding.

​He did the right thing, so he's not considered one of the "greats". 

When the Fed's bust arrived in 1921, Harding said:

“Gross expansion of currency and credit have depreciated the dollar just as expansion and inflation have discredited the coins of the world. We inflated in haste, we must deflate in deliberation. We debased the dollar in reckless finance, we must restore in honesty.”

Such a response is unimaginable from modern-day presidents.

​No one mentions the actions of the central bank. It's ignored completely.

Harding went on:

“All the penalties will not be light, nor evenly distributed. There is no way of making them so. There is no instant step from disorder to order. We must face a condition of grim reality, charge off our losses and start afresh. It is the oldest lesson of civilization…No altered system will work a miracle. Any wild experiment will only add to the confusion.”

In other words, the central bank, via a "gross expansion of currency and credit," created "disorder."

That's what the Fed does. It creates an artificial and distorted economic reality. Nothing makes sense, yet there are always those who say: "this time is different."

No it's not.

Nothing but a return to economic reality, and a liquidation of all the investments that should have never taken place, can fix the situation. That's what Harding's policy was, and that's what took place.

Harding did the right thing. The pain was sharp, but short.

Everyone forgot about it...and him. 

Unfortunately, the Fed didn't go away. When the bust was over, they went on another binge of money and credit creation.

We've all heard about the "Roaring '20's" right? Well, it was the Fed that made it roar.

By 1929, it was time to pay the price...and boy was it a big price.

The stock market crash was monumental.

But this time, Warren Harding wasn't there to do the right thing. This Fed-created bust would land on the lap of President Herbert Hoover, a massive government interventionist.

Hoover would not let a return to economic reality to occur. He would not let the necessary liquidations to take place. Instead, Hoover would throw everything the government had at it, in order to make the bust stop.

Hoover said:

“We might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever involved in the history of the Republic.”

Did it work?

Of course not!

But that never deters government.

FDR would step in as the new president. He would take Hoover's interventions and put them on steroids!

Did that work?

Of course not!!

The combination of Hoover and FDR's massive interventions into the Fed's economic bust created The Great Depression.

They prolonged the economic pain.

While Warren Harding did the right thing....and was forgotten, FDR did everything wrong, and is now considered one of the "greats".

Go figure.

The lesson in this should be glaringly obvious.

When the next big bust occurs (and there's no escaping it) how the government reacts will dictate how long it lasts. If they go all in to stop it by intervening even more than they do now (if that's even possible) then we're in for a long and painful depression.

Based on how government reacted to the bust in 2008, things don't look good. Government can't fix the economic pain, but they can extend it.

And the Fed?

Well, the Fed shouldn’t exist at all.

We can live much better economic lives without the fairytale idea that a few central planners, who sit in ivory towers, are capable of "running the economy."