What Can We Learn About History?

So the US economy is in big time turmoil, everybody is asking what should we do? Is government action correct(which we know now it's not) etc.

So i think we should look back in history and find the solution for the problem we face now.

I will start our history lesson with the father of modern economy, Adam Smith. In 1776, Smith wrote the most famous economy book of all time, Wealth of Nations (901 page though, you should all get the copy and read it. If you can't find it, give me a message and i will send you my copy).

The main idea of WON is free market mechanism. Smith think and proved why our market should not be intervene by government. A new concept called "invisible hand" was introduced. He said let the business cycle roll itself(uptrend-constant-downtrend-constant and start again). If the government intervene, the business cycle will be interrupted and the natural and normal business cycle will no longer there. Then we will have severe economy down turn. The world agreed and the classical economic era started. Since then, everything was fine. Economy of the world was doing great and we were prosperous.

After 150 year of great economic system, we encountered another problem: Great Depression 1929. One of the main causes of GD is debt. The market interest rate was too low and people all over the world borrowed huge amount of money. Debt level was at tremendous level(just like now). Also, US suffered a huge trade deficit (again, just like now) and severe expansion of the money supply in the 1920s that led to an unsustainable credit-driven boom(one more time, same is happening now). So a new era begun: Keynesian. John Maynard Keynes think the economy should be regulated by an agencies and control the market interest rate and money supply(using monetary policy) so that if the invisible hand fail to control or take too much time to control the normal business cycle, this agencies will come out and and control the market interest rate from falling.

So now, the federal reserve are doing the exact opposing things from this two history occasions. First they ignored the Smith's free market theory at 2001 and prevent the bursting of the dot com problem and prevent the normal business cycle from doing it job. To prevent that, they created what we called a credit bubble. They blew this bubble all the way until it is much bigger that the dot com bubble and in August of 2007, it bursted. Then once again they ignore the Keynesian theory and the causes of Great Depression and start lowering interest rate which is exact opposite of what they should be doing.

Every time when you wanna prevent a bubble from bursting, you will create a bigger bubble. Instead of increasing the interest rate and lowering the debt level and money supply just like what saved the world economy during Great Depression, they lowering it! That mean they try to do something nobody dare enough to do: they challenge the great depression which i truly think they will lose to history. By that time, US will suffer a situation much worse than great depression. It will cause the US economy to fall all the way to its root and may never recover again.

To Ben Bernanke, Henry Paulson and rest of the "smart people", you wanna prove Adam Smith, John Keynes and rest of economist wrong, you should prepare to suffer the consequences.

God Bless America!