A very good article, and your analysis is spot-on.

The root problem is that the election cycle is shorter than the economic cycle, so politicians have an incentive to set off booms by lowering interest rates.

When the unavoidable bust eventually comes, the guilty parties are retired on a pension paid for by all the people they defrauded, leaving the incumbent politicians to desperately try to repeat the trick, so the bust won't happen on their watch.

But the boom that comes from lowering interest rates is not from the creation of net wealth, it is from the consumption of capital, which makes us as a society poorer.

Sorry Troy, completely unconvincing. Neither graph says anything - let along demonstrate any connection - despite the fancy circles. One section of the bottom graph shows some sort of correlation but correlation is not causation, as the saying goes.
A few basics:

*The root cause of the global crisis was stupid lending and stupidier gearing up on that lending by poorly regulated American banks which resulted in mass failures. Those failures had a knock on effect through the now tightly interwoven global financial system, exposing weaknesses in other national systems.

* The general financial problems make banks everywhere cautious and their clients even more cautious. No one wanted to borrow, fewer banks were prepared to lend. The whole system paused. Now everyone is recovering from the shock. That basic model fits what seems to be happening.

* Keynesian economics had nothing to do with the original problem but both it and monetary policy are being used to boot economies along again.. maybe its working. We shall see.

* As unemployement rates would take far longer to react to changing circumstances than market prices then the fact that one is lagging the other is meaningless.

Leave it with you.

Troy,

Just how would you deal with the social dislocation which would inevitably occur if the market was allowed to rip?
Will you volunteer to forego your economic stability in order that the market undertake its "correction"?

I notice that you are a dealer/trader. Do you accept any collective responsibility for the current situation?

That's the problem when ideology triumphs over empathy.

Hi Posters. Thanks for reading my article. In response to Curmudgeon: I don’t think it is a leap of faith to make a connection between unemployment and poor market conditions.

“The root cause of the global crisis was stupid lending and stupidier gearing up on that lending by poorly regulated American banks which resulted in mass failures.”

Alan Greenspan had everything to do with this by dropping US interest rates to 1% back in 2001. This created a credit orgy not just in the US but all over the world. Other central banker’s followed suit. Over time we are going to increasingly learn that it is not just US banks that lent irresponsibly. Interest rates set at historically low levels for extended periods of time created a climate where the temptation for banks to soften lending standards became irresistible.

“Keynesian economics had nothing to do with the original problem but both it and monetary policy are being used to boot economies along again.”

How sustainable are present fiscal and monetary policies? The US and UK have essentially run out of interest rates to cut. Can you name me a country in history that has experienced a positive outcome from quantitative easing (printing money)?

To Shal. “Just how would you deal with the social dislocation which would inevitably occur if the market was allowed to rip?”

Let me just say we don’t operate in a “free market”. You can no more set the price of money (which central bankers do) than the government could come out tomorrow and effectively set the price of milk or bread. Free market activity has not got us into this mess but a lack of free markets. Human greed whilst a nasty symptom of what occurred is nothing new and would never have happened to the degree it did under a genuine free market system. There is no silver bullet for the economic mess we are in. More of the same however is certainly not the solution.

Well said, Troy, I agree that Greenspan’s lack of caution was a major factor in the crisis, and that government action here and elsewhere will exacerbate the recession, prolong the recovery and have great net medium/longer term costs through higher tax and interest rates and slower economic growth than would occur if the imbalances were allowed to work themselves out through market forces.

“Government needs to ensure they run their affairs more efficiently and cost effectively. … To argue that government is more effective at investing money than the private and business sectors [makes no sense].” Again, true, the incentives for governments and bureaucracies do not encourage efficiency or effectiveness; while businesses which are inefficient and ineffective go out of business, governments can cover bad policy and management by raising taxes and running deficits. And get 66% popular support while they do so! Good grief!

“The present unfunded fiscal policy employed by the Australian government will only serve to prolong this recession as the private sector now competes with government for scarce capital resources. The share of the economy run by the government will also increase. Antiquated, ineffectual Keynesian economics lies at the heart of our financial problems.” Yes, yes and yes. Ruddonomics is a recipe for an impoverished nation - and for increasing dependence on government, the opposite of what is required.

Troy,

If the market was not the cause of this what was?

What has the last 40 years of free market management of the economy been about?

And i repeat are you going to forego your comfortable lifestyle in defence of the market or should we only expect the marginalised and unskilled and the underclass to do so?

These are real people and this is real pain not some economic theory.