The Fed’s Response to the Financial Crisis: More of the Hair of the Dog That Bit Ya

John Riley nails in a single paragraph what the government is doing wrong in responding to the economic crisis:

The Fed’s response to the financial crisis has been more of the hair of the dog that bit ya. Virtually everything the Fed is doing is increasing debt, not decreasing it. It seems that the Fed’s theory is to keep the drunk drinking to avoid the inevitable hangover. As we have said many times, the longer you put it off, the worse the hangover will be. And we are due for a whopper, thanks to the bartender, I mean the Fed’s irresponsible actions.

Riley has summarized in a few words what the Austrian school of economics, Ron Paul, and everyone else with a good head on their shoulders has been saying for a long time. The problem is that too much credit, artificially low interest rates and cheerleading for the binge by Greenspan and company led to massive malinvestments. The only way to get through the financial crisis is to tough it out until the hangover is really over.

Other people have used the image of heroin to make their point. For example, Financial analyst Puru Saxena compared the bailouts with “shots of heroin to fix the problem of an addict“.

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