Thursday, November 11, 2010

Money and Banking Quote of the Day

From pages 654-55 of Jesus Huerta de Soto's Money, Bank Credit, and Economic Cycles:
The system of financial planning which rests on the central bank cannot possibly eliminate recurring economic cycles. The most it can do is to delay their appearance by creating new liquidity and providing support to endangered banks in times of crisis, at the cost of aggravating the inevitable economic recessions. Sooner or later, the market always tends to spontaneously react and to reverse the effects of monetary aggression unleashed on it, and therefore deliberate attempts to prevent such effects via coercion (or the granting of privileges) are condemned to failure. The most these attempts can achieve is the postponement, and consequent worsening, of the necessary reversion and recovery, or economic crisis. They cannot prevent it.

Creating new liquidity and providing support to endangered banks in this time of perceived crisis is exactly what the Fed has been doing and continues to do with QE2.

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