Lew Rockwell on the purpose of recessions

Writing all throughout the 1930s, both Mises and F.A. Hayek tried to explain that the recession itself served a market purpose, in the same way a correction to an inflated stock market serves a purpose. It re-coordinates economic structures that have grown seriously out of balance.

In other words, they urged that we look back before the recession, to the good old days of economic boom, and realize the prosperity of the past was a partial illusion. The recession is the way that the economy tells the truth about the fundamentals. The illusion itself is caused by errors in monetary policy. Interest rates are driven down by the Fed, and this causes widespread errors in the investment sector. These investments are unsustainable over the long term. The recession is the time of cleansing out errors and reestablishing economic soundness.

The housing boom and bust is only a symptom of a wider problem. If the economy has indeed fallen into recession, we can know with certainty that recession is precisely what the economy needs the most. It is the equivalent of the drunk who needs time on the wagon.

~ Lew Rockwell, "Recession or Depression?," LewRockwell.com, January 10, 2008