Surprisingly few people seem willing to ask what exactly the underlying economic problem is. As long as we avoid that question and simply talk superficially about slow growth, the risk of a "double dip" and the need for "stimulus," I guess the Fed will continue to get away with portraying an image of, at worst, innocent bystander or, at best, a well-meaning and public-service-minded bureaucracy that just keeps trying to fight the recession, diligently exploring all available policy tools. According to this popular view, our economic difficulties seem to have come over us like a bad harvest or an alien invasion. They appear to be entirely exogenous, and the Fed is our friend and partner helping us to get out of this mess.


The reality is different. Like all state bureaucracies, the Fed is in fact struggling with problems that are predominantly of its own making. The Fed is the reason we are in this crisis. Or, more specifically, the present economic crisis is the inevitable consequence of the political decision to adopt a system of unconstrained, constantly expanding fiat money, in which the central bank, in its role as lender of last resort, systematically encourages bank lending and thereby the extension of credit on the basis of money printing rather than true savings. This system came into full bloom only in 1971, when Nixon severed the last link to gold and thus initiated, for the first time in history, a global system of unrestricted fiat-money creation.