Stocks fell last week following news that the yield curve on Treasury notes had inverted. This means that a short-term Treasury note was paying higher interest rates than long-term Treasury note. An inverted yield curve is widely seen as a sign of an impending recession.
Some economic commentators reacted to the inverted yield curve by parroting the Keynesian propaganda that recessions are an inevitable feature of a free-market economy, whose negative effects can only be mitigated by the Federal Reserve. Like much of the conventional economic wisdom, the idea that recessions are caused by the free market and cured by the Federal Reserve is the exact opposite of the truth.
Interest rates are the price of money. Like all prices, they should be set by the market in order to accurately convey information about economic conditions. When the Federal Reserve lowers interest rates, it distorts those signals. This leads investors and businesses to misjudge the true state of the economy, resulting in misallocations of resources. These misallocations can create an economic boom. However, since the boom is rooted in misperceptions of the true state of the economy, it cannot last. Eventually the Federal Reserve-created bubble bursts, resulting in a recession.
So, recessions are not a feature of the free market. Instead, they are an inevitable result of Congress granting a secretive central bank power to influence the price of money. While monetary policy may be the prime culprit, government tax and regulatory policies also damage the economy. Many regulations, such as the minimum wage and occupational licensing, inflict much harm on the same low-income people that the economic interventionists claim benefit the most from the welfare-regulatory state.
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