Like David Beito, I would like to hear economists’ views of the AIG bailout. Just a couple of days ago we heard that the federal government was going to draw a “line in the sand” by refusing to bail out Lehman Brothers. But the monsoons started blowing and the line was obliterated.

I’m not an economist, so here are just a few observations about the turmoil – the “tumultuous 10 days that have remade the American financial system” and today’s “day of high drama in Washington” (quotes from the Wall Street Journal).

Years ago, as an editor at Business Week, I wrote an article about the Kondratieff cycle, a boom-and-bust cycle that supposedly moves in periods of about fifty years. (The fifty-year wave was named for the Russian economist Nicolai Kondratieff, who died in a Siberian prison for suggesting that the Soviet Union had not eradicated business cycles.) Although these long waves were endorsed by Josef Schumpeter and some other leading lights (I forget who!), most economists don’t accept the idea that there are long cycles of rising and falling prices. Nathan Rosenberg looked at the historical evidence and concluded that such a cycle simply did not exist.

I’m not so sure; but even if predictable cycles do not exist, there is the cycle that reflects human memory.

Since people are always being born and dying, the changing “collective” memory affects how policy-makers act.

For example, fear of another Great Depression led to inflation in the 1970s, as policymakers kept “priming the pump,” on the theory that such efforts had pulled the nation out of the Depression. The inflation was ended by Federal Reserve chairman Paul Volcker, who let interest rates rise to then-astronomic levels (which we may see again).

The end of inflation ushered in a long wave of prosperity beginning in the early 1980s (which we have been happily riding until recently). It was possible because the Federal Reserve steadfastly refused to inflate the currency.

But time moves on. People forget. Policy-makers forget. A South Sea bubble mentality takes over and no one is willing to stop it. The high-tech boom did halt abruptly – but the bust was contained because a lot of smart people (famously, Warren Buffett) avoided firms that they couldn’t understand.

Inflation in housing was different. Just about everybody got involved. It was another South Sea bubble, but one that engulfed rich and poor, especially because the federal government’s stepchildren (Fannie Mae and Freddie Mac) did everything they could to wheedle people into debt. Although other lenders lacked the federal government support that Fannie and Freddie had, they did the same. The extent to which the housing boom was spread among lenders and investors through sophisticated financial instruments is something we are just beginning to discover.

I was not alive during the Great Depression so my knowledge of it (and the crises that preceded it) is based on reading, hearsay, movies, and whatnot. But I feel as though we are going through something similar – a probable stock market crash and a possible economic collapse preceded by the frantic efforts of well-intentioned government officials and not-so-well-intentioned rent-seekers.

In their efforts to avoid a worldwide economic catastrophe, policy-makers have abandoned all principles of limited government and individual responsibility. If they are lucky, their Maginot line will hold, and you and I will pay for their abandon with inflation for years to come. If they are not so lucky, the economy will crash. They will be out of their jobs, with even less competent people replacing them, and the rest of us will face hardships we never anticipated. Either way, we are likely to have an unpleasant awakening in the months and years ahead.