I have spewed a fair amount of bile on this blog about the current economic crisis. Maybe it is time I clarify my position, as everyone else seems to think that a recession is the big problem of the day, politicians, commentators and others included.

Let us put it plainly: recessions are not the problem, they are a symptom, nothing else. Recessions are to the economy as hangovers are to excessive drinking, they are self inflicted. A recession is not some grand evil conspiracy where the powers that be suddenly decide to destroy lots of peoples lives, lay people off from work and make corporations stop making profits.

Recessions are the hangover that come from economic excess and malinvestment, it’s that simple. Anything you try to do to alleviate economic problems at the recession stage is like giving first aid to a dying cancer patient – it’s too late to do anything. If you want to avoid the pain of a recession, you should target malinvestment and economic excess long before the recession comes, something that governments and policymakers have consistently failed to do for years during the real estate boom and previous booms.
In fact, governments and policymakers are the prime culprits of this crisis, as they not only stood by idly as the crisis was in the making, they where also the cheerleaders and enablers of the problems that created the crisis as the artificial boom gave the politicians temporary gains in polls and elections.

But what created the excesses and malinvestment and how could politicians be enablers?
Well, the market is by no means perfect, and it is prone to exuberance and depression on a bipolar scale, sometimes in the same day. But still, the market is the best thing we have, in particular when it comes to balancing supply and demand, and setting prices to do this balancing.
But when Alan Greenspan (and fellow central bankers around the world followed suit) put interest rates down to 1% and kept them there long after the recession of 2001-2002 was over it meant that the “price of money” was extremely low. An extremely low price of money by artificial means (rates set by central banks) that the market is given false information to act on.
If money (credit) is cheap and asset prices are booming, this means that market actors (you and me) will be running to get as much money as we can (on credit) to convert it into the asset classes whose prices are booming. This all starts a vicious cycle that at first looks pleasant, but the coming bust has already been made.

Money is a commodity like any other (or should be), and currently the price of money is effectively interest rates you pay to borrow it. However fiat currencies and central banking create a few problems with this.
Most fundamentally, a fiat currency is not a limited resource, creating more money is as simple as adding a few zeros in a computer system. This lack of scarcity means that pricing of money is not only hard, the pricing mechanism is partially put out of play, and real interest rates are hard to set.
Secondly, central banking is just that, central. Just like the Soviet planners failed to sufficiently plan for food production in the old Soviet union, leading to interchanging periods of a glut of food followed by famine, central planning of money is bound to fail. Putting so much responsibility on a few centrally placed people so far divorced from the signals of the real economy is fraught with insurmountable problems.
What I am saying is not that private banks individually would necessarily be any better than central banks at pricing money, but on aggregate the risk would be better distributed and the price would better reflect what the price ought to be.

The boom and bust of the business cycle are inevitable, as are excesses and malinvestment – but without the false signals sent out by centralized monetary policy, the peaks and throughs would be a lot less extreme.
Recessions are not the problem, they are a symptom, the seeds of destruction are sown long before a recession comes along, and those seeds of destruction are more often than not liberally watered and cared for by politicians and monetary policy as the boom years give politicians a false sense of achievement in the eyes of the public.