Fed watchers and George W. Bush supporters (and especially the editorial writers of the Washington Times and The Wall Street Journal) seem relieved now that Alan Greenspan has officially proclaimed that the recession that began a year ago is now over.  

Even as people in New York City observed a brief period of silence to mark six months since the September 11 attacks, the New York Times was pointing out that if the recession is over, Democrats will have fewer avenues by which to attack Bush in the 2002 elections.

While I, too, hope this recession is over, I am not as confident as a Republican pollster or a Times reporter.  The policies the Fed cooked up during the mid-1990s that brought on the unsustainable boom (mistakenly called the "New Economy") are also the policies that Greenspan employed in the last year, ostensibly to give us a "soft landing."  The government is now engaged in a number of foolish regulatory ventures that certainly will make economic life more difficult as we seek to climb out of this latest downturn.

Some history is in order here.  In 1980, right during the heat of the U.S. presidential election between Jimmy Carter and Ronald Reagan, the economy was undergoing a relatively mild inflationary recession.  (Inflation was in double digits, while the unemployment rate was about 6-7 percent.)  By the end of that year, and early into 1981, the economy staged what can best be termed as a mini-recovery.

By the fall of 1981, however, the U.S. economy really was going into the tank.  Political support for Reagan began to dry up, as the press--and the Democrats--mockingly called the president's economic policies "Reaganomics."  The brief  "Reagan Rally" in the stock market had turned into a bear market, and by mid-1982, the press had already written Reagan's political obituary.

In fact, the real recovery did not begin until the latter stages of 1982, but it became strong enough by 1984 that Reagan won reelection in a huge landslide.  The economic boom that began in 1982 would last about eight years before the next recession sank George Bush's presidency.

Will the present recovery run out of steam, or is it a precursor to the next boom (or, should we say, unsustainable boom)?  No one can answer that question right now, and that includes all of the "experts" who are armed with the latest econometric models. We can say for certain, however, that the policies of Greenspan's Federal Reserve System in the past year have paved the way for a mini-boom, but also another bust.

At last report, the Fed had cut its key lending rate to less than 2 percent in hopes of stimulating large amounts of business borrowing.  At the same time, Bush was urging Americans to spend their last dollar in order to prop up retailers during the Christmas season.  There is something ominous in both counts.  

First, low interest rates, and especially those that are artificially low, as is the case here, not only stimulate borrowing that would not have occurred otherwise, but also depress savings rates.

Second, with depressed savings rates also comes less money that can be made available for future capital formation.  As Murray Rothbard has noted, capital formation that is appropriate to a particular economy can come about only through saving, not through the Fed's gyrations.

The pertinent question, then, is this: How much "malinvestment" has the Fed brought into our current economy through its attempts to artificially lower interest rates?  If this "recovery" is based upon those malinvestments, it will not be long before they must be liquidated.

On the other hand, if business borrowing was not artificially stimulated even when the Fed did its interest rate magic (accompanied, of course, by aggressive open market operations), then the current recovery could be a long, sustained one.  

While I like to think of myself as an optimist, I think we need to be cautious before Greenspan and Bush declare victory.  For one, much of the current economic growth seems to be tied to war spending, which is increasing at record rates, along with the growth of government at all levels in the wake of the September 11 destruction.

Although socialists and Keynesians might believe that capitalism can only flourish in the presence of international conflict, Austrians have a more sound take on the whole matter: war is always economically destructive, both on the countries where war is waged and on the country that wages it.

The carnage that U.S. Armed Forces have inflicted upon Afghanistan goes without saying.  However, we also need to remember that war spending is done by "crowding out" private investment.  Furthermore, war invites more government controls that come back to haunt people after the conflict has ended.

Of course, the regulatory monster has hardly stopped to burp in the last few years.  One of the quieter--and sadder--legacies of the last boom was that both political parties rushed to impose even more regulations upon the economy. Since regulations are implemented over time, it is often difficult to gauge their effectiveness during those first few years.

For example, the real force of the Clean Air Act Amendments of 1990 was not felt until the spring of 2000, when new gasoline reformulation regulations kicked in and wreaked havoc across the country, sending gasoline prices through the roof.

The California electricity debacle, along with the implosion of Enron and Global Crossing, is in the process of bringing a new wave of regulation, both in electricity and financial markets.  This certainly bodes no good thing for long-term recovery.

Please understand that I am not predicting another recession to occur next month or even next year.  We need to remember, however, that between the Fed's interference with the natural rate of interest and the desire of politicians to load the economy with even more regulation, someone must bear the cost.  

Just as we have learned once again that the "New Economy" is not recession proof, we are also going to learn that the old rules of free markets still apply: if government interferes with the ability of people to freely engage in exchange and production, sooner or later, the economy as a whole will feel the punch.