It's the Fed

Heleen Mees in Foreign Policy gets it. . . at least partly. In her article "The Perils of Loose Living," she explains how too much debt fueled our economic crisis and that the Fed bankrolled the whole thing. (Thanks to my friend and colleague Sam Stanton for alerting me to this article). As she correctly notes:

The real culprit was the Federal Reserve. With its ultraloose monetary policy in the early 2000s, the Fed single-handedly created the refinancing boom and ushered in the housing bubble. The record-low interest rates not only fed the boom that had to go bust, but also favored that sector of the U.S. economy that is predominantly financed with debt, i.e., the financial sector, at the expense of sectors that are more reliant on risk capital, such as manufacturing. That might explain why, by the mid-2000s, bank profits accounted for 30 percent of all profits reported by S&P 500 companies. In other words, Americans stopped making stuff and relied on paper earnings instead.

Mees also rightly understands that the Fed pushing for even more monetary expansion will not solve our problem.

Unfortunately, her prescription is not nearly as insightful. She plays our ailing economy off against that of the Chinese and the Germans. She asserts that both of their economies of booming and implies that the secret to their success is government spending on research, development, and innovation. That is what they used to say about Japan's economy before it took a nosedive back in the early 1990s. If the Chinese have to "cool down" the economy, that is an indication that the boom is a product of monetary inflation and, hence, unsustainable.

No, government spending of any kind is not the solution either. The only thing that will put our economy back on a firm footing is to free the market: stop increasing the monetary base, cut government spending, and reduce business regulation. This will allow for more saving and investment in productive activity, which is the true job creator.