News From Terre Haute, Indiana


March 19, 2009

Arthur Foulkes: A free market answer to calls for government ‘stimulus’

Recently, an Indiana State University economics professor wrote a letter published in the Tribune-Star critical of my economic analysis of the current recession. Or, as he put it, what I claim as economic analysis.

My critic used the words “outrageous,” “fallacious,” “ludicrous,” “fundamentalist,” “dogmatic,” “historically inaccurate” and, my favorite, “crackpot” to describe my arguments.

(I wonder how he really feels?)

To refresh some memories, my arguments were that the Federal Reserve , by printing massive quantities of money, especially after the dot-com bubble burst and after 9-11, essentially laid the groundwork for the housing bubble (actually, my critic seems to have overlooked this argument).

I also wrote that Fannie Mae and Freddie Mac, both government-created enterprises, helped subsidize home purchases, further inflating the housing bubble.

My column also stated that the government should keep its hands off the economy. Having gotten us into this mess, neither the Fed nor the rest of Washington are competent to get us out. Rather, the market should be allowed to adjust to reality without new distortions introduced by lawmakers and bureaucrats, I argued.

And, as I’ve done many times in this column, I contended that a free-market money, such as money backed by gold, would be superior to our fiat money system. Our fiat system lends itself to the boom-bust business cycle in general and market-distorting bubbles in particular, I also argued.

As far as my “historical inaccuracies” go, I stated that Japan’s experience in the 1990s with a long recession and America’s Great Depression show that government intervention can prolong, rather than shorten an economic downturn.

Several times in this column I’ve tried to explain why I favor a gold-backed money over Fed management of money supply, so I’ll limit myself to writing that when folks in Washington inject large amounts of new money into the economy, they create important distortions. Most important, interest rates can be badly distorted by these injections, and interest rates – believe it or not – are an important market signal. Government tampering with interest rates is, in effect, no different from tampering with any other market signals. The results are just as bad.

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    March 12, 2010