Friday, September 07, 2007

"There is no means of avoiding a final collapse of a boom brought about by credit expansion"

Would-be pundits such as Brian Gaynor et al who offer their opinions on the collapses and troubles in finance houses might want to add to their researches the subjects "creative destruction" and "malinvestment" (a misallocation of resources often following a period of artificially excessive credit)-- two concepts without an understanding of which no punditry could be considered informed -- and the story of the 1970s bailout of Britain's "secondary banks" should be another topic worth reading [hat tip Elijah].

Writing in 1949, Ludwig von Mises might have been talking to today's pundits:
There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as the final and total catastrophe of the currency involved.
If only the pundits were listening. There are no shortcuts to the inevitable. Tell failing finance houses "Screw up and we will bail you out," and what do you think that will do to the number of screw ups, and to the amount of extra risk the screw-ups take with your money?

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3 Comments:

Anonymous Anonymous said...

Except Finance coy problems have not been brought about by 'credit expansion'.

In fact there is no such thing as credit expansion anymore - not with globalisation.

Another thing - this blog is the ONLY place we have heard people ask "Why don't we bail out FTX investors - what's the difference". More proof that the blogosphere is the hub of the intellectual universe...

Before you and your cohorts comment on FC's (and if you wish to be taken seriously),you should at least take the trouble to learn what a finance company actually IS, and how it differs from other listed companies.

9/07/2007 07:07:00 pm  
Anonymous raf said...

As Ludiwg wrote, and many before him, its built into the system. I out a post up about Liverpool back in 1794. See www.sustento.org.nz/blog

Fred Harrison has mapped out a boom bust cycle going back over 200 years and has identified the cause...property based credit financed booms. 18 year cycle.

A paper on my site "the nature of money" actually demonstrates the maths of credit and compound interest.

9/07/2007 07:09:00 pm  
Anonymous banker said...

anon

That's not very nice sentiment to express on a Libertarian site!

Take a look at what the Austrian School of Economics has to say about it. Recently Prof Reisman wrote an interesting article for the Free Radical magazine in New Zealand. Well worth fetching a copy.

The business cycle is indeed caused by credit expansion and right now it would appear we are entering a contraction (bust) phase. Certainly that's what the finance companies in New Zealand are presently experiencing.

Banker

9/10/2007 08:34:00 am  

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