Friedrich August von Hayek seems to fault the low interest-rates policy that preceded the depression for its length. As I said the short-term rates are mostly irrelevant to a Keynes' Liquidity Trap. I showed that the only good monetary policy is to manage a normal yield curve. I believe, without having proved it yet, that any other monetary policy increases the speed of the fall in the Liquidity Trap. It is hence normal that the FED would decrease the short-term yield when the long-term yield were going down.
As far as to say that excess liquidity increases the length of the Depression, it defies my intelligence. I don't see why it would. I will prove that Quantitative Easing and trying to inject excess liquidity don't help in the Liquidity Trap (This is precisely why it is called a Liquidity Trap - Chapter IV: Economic Policy in a Depression) It is like a placebo: if it doesn't help, it doesn't do any harm either.
In fact, Alan Greenspan did increase short term rates in order to avoid the Keynes' Liquidity Trap. Would that it had worked, it would have caused a recession and a hike in long-term rates. But it didn't. It did however caused the inversion of the yield curve and the infamous sub-prime meltdown. The supreme irony here is that many have blamed the low interest rate policy of the Maestro for what was caused by his high interest rate policy!
Economic Darwinism:
If competition is necessary in any free market economy, too much competition might defeat its own purpose: an excessive competition does destroy any cooperation, which can be necessary to achieve economic development and other goals of the society. The behavior of economic agents might become predatory and cause the destruction of the economy or the society: it is precisely what causes the Liquidity Trap. Moreover, what is a good venture? How do we know which one should fail?
In a Liquidity Trap it is true that, at the beginning, the most likely to fail are the weakest. Those would have failed anyway. But later on no one is immune: those who fail are those which are financially leveraged, operationally leveraged, those whose customers rely on credit to finance their purchase, those which are in a market for discretionary goods, and those whose products have a cheap alternative.
For example, I can perfectly conceive that one of the first companies that will fall will be Apple. Does that mean that this company has become suddenly bad and that it doesn't deserve to survive? What I want to stress is that what is good in one environment might be bad in another one. Do we want to emerge without an Apple after the Depression? The result of a Liquidity Trap is a great leap backward in civilization.
Obviously Economic Darwinism is not an argument for Liquidationism.
Moral Notion:
Economy is a science, a difficult science, but when you have found the hidden variable it leaves few room for random phenomenon.
Because for certain there is so much randomness in Economists' models, they believe that they can apply to the economy their vision of good and bad as if they were like some mini Gods that could create the universe from Tohu Bohu. These madmen in authority have no place in science, they belong to cults where only Gurus prevail.
Economy is not about Good and Bad, it is about Equity, Supply and Demand. It is only after we have done the analysis, after we have defined what are the necessary conditions in order to obtain a viable system that we observe the result and ask ourselves if we have been instruments of good or for evil.
I have, like others, strayed outside the rigor of Mathematics, probably even more than many others. Like any Mathematical intuitions, mine comes from associations. But after all things are said and done, I finish my scientific work and test it from a logical and mathematical standpoint. Then I will allow myself to examine it from a religious, philosophic or moral point of view. For if it doesn't work who really cares about its consequences?
"The writer of a book such as this, treading along unfamiliar paths,
is extremely dependent on criticism and conversation if he is to avoid an undue proportion of mistakes.
It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics (along with the other moral sciences), where it is often impossible to bring one's ideas to a conclusive test either formal or experimental."
John Maynard Keynes, 1st Baron Keynes of Tilton
(5 June 1883 - 21 April 1946)
The General Theory of Employment, Interest, and Money.Preface
13 December 1935
On both sides of the aisle, people have tried to judge Liquidation and Creative Destruction from a moral standpoint. It is something that does not belong to a scientific analysis. I shall not address the issue here. All this belong to the last Paragraph of this tract: Chapter V, Paragraph 3: Moral, Philosophic and Religious Implications of the Credit Free Economy.
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