Why the obsession with dodging recessions is a bad thing

There was the December quarter of 1981 through to the March quarter of 1983, partly caused by a drought, but also a collapse in mining revenues coupled with wage rises caused by deregulation and pattern bargaining.

By now, I was working in finance and then property, both of which are particularly susceptible to recessions. In 1986 saw more negative growth, and then there was former Prime Minister Paul Keating's "recession we had to have" in 1990-91.

Recessions are normal

There was a variety of reasons for these recessions and downturns, but really only one underlying cause.

Economies are stochastic, and while they tend to equilibrium, this involves overshooting and undershooting their optimal capacity.

Too much overshooting will bring at least an equal and opposite reaction as the ability of the economy to meet all demands is put under too much stress.

The Great Depression was caused by easy money that led to a stock market boom and then a bust as central bankers raised interest rates and banks failed.

The stock market bust was also probably partly a case of crowd psychology as new buyers dried up at the prices being asked, and then a fear of loss drove prices down as investors panicked and tried to exit the market all at the same time.

Measures taken to fix the situation, such as erecting tariff barriers, actually made things worse. And then there was the redirection of valuable government resources into wealth-destroying, make-work projects to keep men in work-they were unemployed as a result of government policies in the first place.

So in their desire to avoid a recession, bankers and governments made it worse.

This generation of central bankers isn't driven so much by the Great Depression as by the inflation shocks of the 70s. In Australia, these shocks were driven by circumstances and politicians who had learned the wrong lessons from the Great Depression.

What our current crop of central bankers has learned is that you want to avoid bank failures at all costs and that asset price inflation is better than asset price deflation.

Neither of these is correct.