Fiddling with gravity!

Financial crises can be very difficult events to understand.  Even for those who have spent a great deal of time studying such areas as finance and economics, comprehension of these disasters can be elusive.  However, analyzing shared elements in the recent American and Greek financial crises can help give even the economic layman insight into their common causes.

One word can be used to sum up the basic concept behind both of these crises – overextension.  Both the American and Greek governments attempted to take on a much heavier economic load than either could handle.  While, in both cases, this has been painted by some as a noble, humanitarian effort to help those in need, methods such as inflationary monetary policy tantamount to theft and the disguising of massive budgetary deficits (in both cases with the help of Goldman Sachs) would not justify the means employed even had these efforts been successful, and certainly should be taken to task considering the disastrous ramifications of these actions.

In both cases, many are citing unrestrained spending as the source of the problem.  For example, CNN wrote of the Greek crisis that “years of unrestrained spending, cheap lending and failure to implement financial reforms…whisked away a curtain of partly fiddled statistics to reveal debt levels and deficits that exceeded limits set by the Eurozone.”

Without suggesting that CNN was attempting to be deceptive in this explanation, as the points made certainly are important, it must be noted that things like unrestrained spending, cheap lending, and fiddled statistics are merely symptoms of the deeper disease.  Instead of asking the government to spend less, tighten lending laws, and implement financial reform, one should instead ask the deeper question – how does the government even have the power to cause such problems in the first place, and why are the results of such government power so often much more hurtful than helpful?

This deeper problem, whose symptoms we are now dealing with, is central banking.  The Federal Reserve System and its Greek counterpart, the Bank of Greece, each had a heavy hand in their respective nations’ financial collapses.  This is due to these banks’ attempts at economic manipulation – the Federal Reserve directly sets interest rates, while the Greek system uses more indirect methods to do nearly the same thing.   Note that it is due to their attempts at economic manipulation, as attempting to set economic law is about as useful as attempting to set gravity.

Consider this metaphor of setting gravity.  A man claims to be able to set the force of gravity on the earth.  He tells a stunt biker that he can set gravity to be half as much as normal.  So, the biker attempts to jump a distance that is much longer than he normally would attempt.  Upon jumping, the biker finds that, obviously, the first man never was able to set the nature of gravity at all, and he falls to the ground long before reaching his destination.

This is exactly what happened due to the actions of central banks in the cases of both the United States and Greece.  Interest rates and other natural economic restrictions were said to be more flexible than they truly were. Thus, individuals who based their actions on this information ended up engaging in activities that were far more risky than usual.  However, once they had “jumped,” so to speak, they found that, in fact, economic law was as strict as ever, and they “fell.”

However, if the answer is so obvious, why are we not hearing more about it?  Each of these financial crises is extremely complicated, and the above described scene is, it must be admitted, an oversimplification.  This is not to say that it is not accurate, but rather that this nature of the crises’ root cause is not immediately apparent to all upon examining the situation.

For example, a person who has been educated their entire life in an economic school that praises central banking, deficit spending, and government action in general would certainly seek to find another cause for the crisis, perhaps by blaming business owners for making risky investments or stating that government controls were not strict enough.  However, a person who has studied and understands the damage done by central banking and government economic controls will be quick to realize what has occurred.

People with such knowledge are becoming more and more common in both the United States and around the world.  “Even today, with an economic crisis raging, the response by our government and the Federal Reserve has been characteristic,” Ron Paul writes in his recent book, End the Fed.  “Interest rates are driven to zero and trillions of dollars are pushed into the economy with no evidence that any problems will be solved.  The authorities remain oblivious to the fact that they are only making our problems worse in the long run.”

While he may be one of the most popular adversaries of central banking, it is not just Ron Paul, or even Austrian economists, who are calling out government for its role in these financial crises.  In an e-mail to supporters, Democratic congressman Dennis Kucinich cited “the 1913 Federal Reserve Act, the banks’ fractional reserve system and our debt-based economic system” as major factors in the American crisis.

Such complex and important issues as economic crises need all the attention we can give them, and it is impossible here to provide the in-depth analysis that these situations merit.  It also must be noted that while both the United States and Greece have to an extent both engaged in central banking to their detriments, each country does have a different system.  Still, the general principles hold, always returning us to that first word – overextension.  As long as nations attempt to manipulate the laws of economics to engage in far grander pursuits than they can sustain, we can expect to see such economic crises as have been seen in the United States and Greece in the future.

By Elliot Engstrom