"The real threat to capitalism and democracy, however, is depression and unemployment"

From the FT comes some Burkean sense:

"Is your recession really necessary?

Published: January 2 2009 18:53 | Last updated: January 2 2009 18:53

What a bleak midwinter. It is still hard to see where any green shoots of recovery will break through the permafrosted ground. The recession seems especially unnerving given the length and scale of the good times which preceded it – years in which the current malaise was brewed. It is, therefore, tempting to believe that the world deserves and needs recession to pay for those excesses and to rid ourselves of our unnecessary indulgences. This view, however, is wrong( I AGREE ).

In the past few years, the world economy stumbled out of kilter. House prices were unsustainably bloated by cheap money( NO. POOR LENDING PRACTICES. ). Deficit countries, such as the UK and the US, borrowed frantically to sustain their consumption. Surplus countries, such as China and Germany, grew rich by sating their bingeing. ( THIS WAS THE SYSTEM. REPLACING IT WILL BE HARD WITHOUT SOME SOCIAL DISLOCATIONS. )

These imbalances had been allowed to grow to enormous sizes, nourished by dangerous financial magic. Mortgage straw was not respun, but rather packed into bails and relabelled as triple-A gold( NONSENSE. IT WAS FRAUD, NEGLIGENCE, FIDUCIARY MISMANAGEMENT, AND COLLUSION. ). The financial services industry engorged itself, ran up large profits and paid its staff huge bonuses( AND COMMITTED... ). But the pro-cess also contributed handsomely to government budgets( A HYBRID ) and created enormous demand.

Having lived beyond our means( THIS IS SILLY. ), some economists, notably disciples of the Austrian School, would say that we need recession( WE NEED SOCIAL DISLOCATION AS WELL I SUPPOSE. ). The “malinvestment” of the past few years must be liquidated away. The inefficient, along with charlatans and fraudsters, must be exposed. In 1934, during the Great Depression, Ludwig von Mises wrote that policymakers should have been “raising the rate of interest and restricting credit and so giving free play to the purging process( IT'S LIKE A COLONIC. ) of the crisis”.

To von Mises, policy that aimed to “bolster up undertakings that would otherwise have succumbed to the crisis, and on the other hand to give an artificial stimulus to economic life by public works schemes ... eliminated just those forces which in previous times of depression have ... paved the way for recovery( AND REVOLUTION )”.

Such liquidationism makes a fine morality tale: you reap what you sow. It should be little surprise that many prominent members of the Austrian School – and most of its key adherents – are and were socially conservative. But it took the genius of a man whose inhibitions were informed by life in the Bloomsbury Set to fully explain why this is so very wrong.

One of John Maynard Keynes’ great insights was to understand how, in a crisis, demand would not necessarily fall back to the desired sustainable level. If all market actors pull in their horns( A PANIC ), the result is the paradox of thrift: demand will dry up, and economic activity will crack and crumble with it. Crisis will certainly arrive, and it may not leave. Once demand has evaporated, economies can slide into a low-employment, low-growth equilibrium. Governments must respond by supporting demand with loosened monetary and fiscal policy( TRUE ).

These weapons are slow-acting blunderbusses; they do not allow for rapid responses or fine-tuning. But they are preferable to von Mises’ harsh prescription, which could deepen the recession. It is not possible to liquidate the malinvestment without risking allowing unemployment to spiral out of control and demand to fall with it. Such a plan would be less a healthy purgative, and more an acid bath( VERY TRUE ).

Businesses can, and should, still fail( TRUE ). Politicians must not subsidise existing companies( THEY WILL ). Nor should they seek to prevent necessary( ? ) adjustments which must take place. If this is what John Maples, the UK conservative MP meant when he said the “recession has to take its course”, then he is right. But governments must work together, internationally, to sustain demand. They must not sit idly by.

The allure of the Austrian story lies in its devotion to the free market. The real threat to capitalism and democracy, however, is depression and unemployment( AND REVOLUTION AND TOTALITARIANISM ). It is not countercyclical fiscal policy."