The problem with Keynesian economics is it is based on a false credit economy. The government spends money it does not have boosting the economy with artificially inflated demand. These effects are temporary - the economy invariably goes into a slump as soon as government spending diminishes. That is why countries experience post war depressions - the economy is artificially stimulated under the demand for war-level production, which in turn demands high levels of employment. When the war ends, so does the demand for high level production, and in turn, high employment demands. The economy slumps from the combined weights of decreased demand and the need to pay back the money spent during the war.
Prior to WWI, countries weathered their post war depressions naturally, paid back the debts, and moved on. But the WWI post war depression was far more extensive than others due to the extensive level of the war itself, plus that additional factor of the Treaty of Versailles driving Germany's economy to complete collapse. Other mistakes made at the beginning of the slump (ie: Keynesian attempts to control the depression) resulted in the Great Depression - which in reality was a simple post war depression magnified by mistakes made in trying to avert it.
Since then we have never managed to actually pull ourselves out of the mud pit. Keynesian economics under FDR were instated in an attempt to mitigate the depression, but it was not until we moved the economy to a partial war footing under the lend-lease act, and later full blown war footing as we entered WWII ourselves that the depression was overcome with increased economic activity. The economy started to flag again after WWII, but the combined factors of the Korean War, Vietnam, and cold war kept us on a semi-war footing until recently.
After Vietnam we slumped again to be treated with massive deficit spending to keep things afloat. Of note is the start of credit spending on the part of the general populace during this time also. Also of note is how both parties used their own techniques, from mandating new definitions of fair lending practices, to easing banking regulations in order to make high risk lending profitable. But the core purpose of these moves made under various administrations and under various congresses with various majorities had one overriding purpose: to continue artificial stimulation of the economy through credit spending on the part of the people as well as the government.
And THAT is the basis of Keynesian economics: artificial stimulation of demand. But the problem is it is ARTIFICIAL. It is the creation of a FALSE economy under the theory that the economy will eventually grow enough to take over without additional stimulation. But history has shown this theory to be completely false. Every single time the economy has been left to grow on it own and deficit spending diminished (it has yet to be eliminated), every time credit levels under the latest banking laws max out, the economy goes into a slump. Even the dot.com bubble economy is an example of this: dot.com was as much the result of extending credit as growth of new companies, and the bubble crash was the direct result of reaching the upper limits of the credit bubble.
The latest crisis was/is nothing more than the latest brick in the wall of Keynesian failure. No, it is NOT the result of "failed policies of conservative economics" as the mindless "lets make the government dig us out again" morons would have us believe. It is/was the result of the latest Keynesian maneuvers to keep the economy going through credit spending running into its inevitable ceiling. Specifically, bank made mortgage loans to people who had no genuine ability to pay them off, laws were changed to allow banks to sell said bad mortgages as high-end investment packages, and when the bottom fell out the whole house of cards came tumbling down.
Along come the Keynesians with their bullshit theory and start building up the next house of cards. What Keynesians will not admit, or cannot fathom, is the current crisis, which they are ONE MORE TIME!!! trying to address with Keynesian policies, is the direct result of Keynesian policies instated at the LAST crisis, which was the result of Keynesian policies from the previous crisis, going all the way back to Keynesian policies trying unsuccessfully to avert the post war depression following WWI. Keynesians are the working definition of insanity.
Bottom line: the economy can NOT be forever artificially supported. For economic growth to occur consistently, the level of artificial support must also grow. But we cannot spend on credit forever - it MUST eventually be repaid. We are already at the point it is questionable whether the debt CAN be repaid. But if it can not be repaid, the only alternative is complete collapse.
