The current Chronicle Review has an interesting piece entitled “Wall Street’s Delusions” by Fordham history professor Steven Stoll. What I found especially interesting is that Stoll favorably mentions Pepperdine economics professor George Reisman, a leading exponent of the Austrian School. Specifically, Stoll quotes Reisman on the harmful effects of government-induced credit expansion.

I have long been a fan of the clear-eyed Reisman, who always gets at the fundamentals of economic questions. In response to the article, I just sent the following letter:

I applaud Professor Steven Stoll for his article “Wall Street’s Delusions,” in particular his grasping of the economic truth that, as he quotes Prof. George Reisman, “credit expansion is responsible not only for the boom-bust cycle but also … sharply increased economic inequality.”
We seem to be at a “teachable moment” in our history, and here is the crucial lesson. Real capital can only come from saving; when a government central bank attempts to create capital out of thin air by artificially increasing the supply of money, it can temporarily drive down interest rates, but in doing so it induces people to act differently than otherwise. That is, they invest and produce in ways that are not in accord with economic reality.
Since it isn’t possible to keep the credit bubble and the bad investments it leads to expanding forever, at some point there must be a recession. That is a period of adjustment when resources that were drawn into investments and production that looked profitable during the bubble become unemployed until profitable uses for them are discovered.
The ability of the government to manipulate money and credit causes our periodic recessions. Many blame them on a supposed instability in capitalism, but without erratic monetary policy and government meddling (such as the decision to promote “affordable housing” by pressuring lenders to relax their standards), we wouldn’t suffer them.
Reisman and other “Austrian” economists have long argued that if you really want to help poorer people you should advocate laissez-faire policies, since government macroeconomic tampering hurts them far more than it helps them. But for the wealthy and politically connected, it’s the reverse. They’re apt to make out very well during the expansion and then get bailed out. I recommend Reisman’s book Capitalism to anyone who wants to delve into this topic.