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… is from pages 18-19 of John Allison’s excellent 2013 book, The Financial Crisis and the Free Market Cure [2]:
In theory, the Federal Reserve was created to reduce volatility in the economy. In fact, the Federal Reserve reduces volatility in the short term, but increases volatility in the long term. In a free market, because human beings are not omniscient, markets are constantly correcting. Poorly run businesses, or businesses for which customer demand has changed, go out of business, and new businesses that do a better job of meeting consumer demand are created. A free market is in a constant correction. It is always searching for the best way to produce goods and services at the lowest cost and of the best quality.
When the Federal Reserve steps in and uses monetary policy to stop the downside correction process, all it achieves is to defer problems to the future and make them worse. Its action delays and distorts the natural market correction process, thereby reducing the long-term productivity of the economic system by encouraging a misuse of capital and labor.