How an Economy Grows and Why it Crashes

Epilogue

The sorry outcome seen by Usonia in this tale need not be the fate ultimately encountered by that much larger island, the United States of America. Unfortunately, the longer our leaders pursue ever larger doses of the identical policies that were responsible for the financial crisis in the first place, the greater that eventuality becomes.

Although the idea of government stimuli as an antidote to the apparent failures of capitalism was born with Keynes, and nurtured with Roosevelt, it wasn't until Alan Greenspan, George Bush, Ben Bernanke, and Barack Obama that the idea really came into its own. Before 2002, we had never seen federal deficits of this magnitude (now exceeding $1.5 trillion annually), and we had never experimented so radically with ultra low interest rates and manipulation of credit markets.

The mistakes have been so simple, and yet we continue to make them.

In 2002, following the malinvestments of the dot-com era, when billions of dollars were poured into utterly hopeless companies, the economy entered what should have been a protracted downturn. But George Bush, then newly elected, didn't want a bad economy to jeopardize his reelection. So he, and his advisors, dialed up the Keynesian remedies of spending and easy money to an extent not seen for generations.

As a result, the recession of 2002–2003 was one of the shallowest contractions on record. But that benefit came with a heavy long-term cost. The United States ended that recession with greater imbalances ...