Blame “Easy Credit” for Business Cycles

"Business cycles and economic downturns are a natural by-product of a capitalist economy." So the common refrain goes. Nonsense.

In this oldie-but-a-goodie Freeman article, Brian Summers dispels this myth.

"Critics of capitalism assert that recessions are caused by free enterprise. But when pressed on the matter, these critics can never find anything in the free market that would cause vast numbers of businessmen to simultaneously err."

Summers articulates in layman’s terms what’s really behind economic downturns and recessions; the causal relationship between easy credit and malinvestment.

"It is the easy money that misleads businessmen. Projects that formerly appeared too expensive—not likely to yield profits—suddenly seem less expensive … economic recessions are primarily the result of government credit expansion which misleads businessmen into attempting dubious projects, creates a boom in the capital goods industry, and causes prices to rise. When rising prices scare the government into reducing the rate of credit expansion, the economy—particularly the over-extended capital goods industry—suffers a recession."

Keep this in mind as the Fed decides to cut interest rates. This is nothing more that an attempted quick fix. Enticing business owners to invest with easy credit will inevitably result in another downturn/recession. It may be one year or several years, but the only question is not if, but when? (Note: fiscal policy will also play a role in this, but once investors adjust to any tax changes, the monetary influence kicks back in)

One thing that is for sure, when the economy does head south, expect progressives to (wrongly) blame the evil free-market system for causing such hardship.