From Financial Fiasco
by John Norberg
“The financial strategist George Cooper, who wants to rehabilitate a Keynesian analysis of the financial market, sees similarities between interventionist economist John Maynard Keynes’s desire to stimulate demand in times of crisis and the behavior of the serial rate-cutters at the Fed-interestingly, however, he thinks the latter are more Catholic than the Pope in this respect. Keynes believed that an economy should be stimulated to escape from a deep depression. The Fed and the politicians of today have systematically stimulated the economy to keep it from ending up in a recession in the first place.”
“This is what Cooper terms “preemptive Keynesianism.” The difference is subtle but important. Recessions send important messages to market players, telling them that their investments have failed and that they have borrowed too much. That forces them to give up bad projects and get out of bad investment positions, moving the money to more productive parts of the economy.”
“If the central bank and politicians step in every time to save the economy from a recession, it will lull borrowers and lenders into a false sense of security that will make them take ever-greater risks. They will be pushing a growing mountain of debt in front of them, and eventually the stimuli will not be a large enough to prevent a collapse.”
While many consider the meltdown a failure of capitalism and the free market, it would be more correct to see it as a failure to let the free market function. The Fed appeared infallible under Greenspan because he avoided so many small crisis by pushing liquidity into the system. But by not allowing the excesses to correct themselves, it only made the underlying problem and the eventual reckoning worse.