Mises Quote of the Day: Monetary Inflation is No Remedy

It seems that Tim Geithner's stock (reputational, not financial) is riding high two years after the financial crisis became impossible to recognize. The man himself claimed recently that the economy is in a "much stronger position than it was before the crisis" two years ago. Along with Bernanke, Geithner is credited by many with stabilizing our financial system via TARP and bailing out Fannie Mae and Freddie Mac so as to forestall another Great Depression. With unemployment persisting between 9 and 10 per cent, however, it seems to me that the jury is still out regarding the health of our economy. What may appear as economic health, may merely be another inflated stock market. Let us not forget that the stock market was looking pretty robust immediately before the crash of 2009.

All of this brings to mind a passage from Ludwig von Mises' Monetary Stabilization and Cyclical Policy (written in 1928) I read recently. In a section evaluating monetary inflation as a policy response to a recession once it begins, he writes:

It may well be asked whether the damage inflicted by misguiding entrepreneurial activity by artificially lowering the loan rate would be greater if the crisis were permitted to run its course. Certainly many saved by the intervention would be sacrificed in the panic, but if such enterprises were permitted to fail, others would prosper. Still the total loss brought about by the “boom” (which the crisis did not produce, but only made evident) is largely due to the fact that factors of production were expended for fixed investments which, in the light of economic conditions, were not the most urgent. As a result, these factors of production are now lacking for more urgent uses. If intervention prevents the transfer of goods from the hands of imprudent entrepreneurs to those who would now take over because they have evidenced better foresight, this imbalance becomes neither less significant nor less perceptible.