Friday, March 13, 2009

“Ignoring the Austrians Got Us in This Mess" – Barron’s magazine

The British and United States governments may be happy to promote their ‘new’ printing money programmes –- the Fed for example, in attempting to ‘save’ the world by inflationism by increasing base money supply at a rate of 150% since last September–- diluting the purchasing of every existing dollar and pound with every new banknote they print –- but at least Alan Bollard is unprepared to go completely down that path.  Yet.

Anyway, while the denizens of government are inflating the hell out of their media of exchange, at the behest of Keynesians and Friedmanites, the influential Barron’s magazine, for one, is writing about the perils of ignoring Austrian economists.  “Ignoring the Austrians Got Us in This Mess" says the headline:

   The standard construct of the economy used by virtually all forecasters, from the Federal Reserve on down, is basically Keynesian, with varying opinions about how the model works. That none of them predicted the current crisis is telling, and indeed damning of the approach.
    What definitely is ignored in academe is the Austrian school of economics, especially for baby boomers brought up on Samuelson's economics text, which was pure Keynesian orthodoxy. I did not learn the names von Mises and Hayek or their ideas until a decade or more after graduation (with a degree in economics, by the way.)
    The Austrian view is a mirror image on the right to Minsky's from the left. The economy, if left alone, is self-correcting, say the Austrians. But central banks' inflationary expansion of credit produces booms and
malinvestments, which inevitably lead to a crashes and depressions.
    The only prevention for boom and busts are sound money, which is impossible with government-controlled central banks. Once the bust comes, the only cure is to let it run its course; allow the malinvestments go bankrupt and let the market reallocate the capital to productive uses....
    The Austrian prescription, of course, was rejected first by the New Deal of Franklin D. Roosevelt, and now by massive response by both the purportedly conservative Bush administration and now the Obama administration. First came the $700 billion TARP last year to stabilize the financial system, followed by the $787 billion fiscal stimulus enacted last month. Across party lines, it's accepted that government's role is to prevent the economic pain that would come of "liquidate, liquidate, liquidate."
    But the Austrians were the ones who could see the seeds of collapse in the successive credit booms, aided and abetted by Fed policies, especially under former chairman Alan Greenspan. While he disavows (again) the responsibility for the boom and bust, most recently on Wednesday's Wall Street Journal Op-Ed page ("Fed Policy Didn't Cause the Housing Bubble," March 11), monetary policy played a key role in creating successive bubbles and busts during his tenure from 1987 to 2006...
    Austrian economists assert the current crisis is the inevitable result of the Fed's successive efforts to counter each previous bust. As the credit expansion pumped up asset values to unsustainable levels, the eventual collapse would result in a contraction of credit as losses decimate banks' balance sheets and render them unable to lend. That sounds like an accurate diagnosis of the current problems.
    In the meantime, both Western democracies and autocratic governments such as China are actively utilizing the ideas of both Keynes and Friedman alike in enacting massively expansionary fiscal and monetary policies to counter the crisis resulting from the severe contraction in credit.
    If these policies are successful, perhaps governments will adhere to Austrian principles to prevent a new boom and bust. That is for the next cycle, however. To paraphrase St. Augustine, governments may be saying, "Make us non-interventionist, but not yet."

As you can see, it’s so good I had to quote most of it.

If Austrian economics is still a stranger to you, then perhaps the best place to start in the present context is the Mises Institute’s Bailout Reader – which includes many of those predictions of collapse Barron’s mentions above.

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3 Comments:

Blogger Sally said...

I am not an economist, but have been getting Mises Alerts daily and the articles make common sense to me.

Cactus Kate 10/3/09 had a good blog on "the Two John Keys" The good John Key and the 21 ways to spend NZ out of recession.

I have doubts at John being true to the good John Key! "Make us non-interventionist, but not yet."

3/13/2009 03:44:00 pm  
Blogger Jeff Perren said...

Greenspan tries yet again to disavow any responsibility for the crisis. Shameful.


"There are at least two broad and competing explanations of the origins of this crisis. The first is that the "easy money" policies of the Federal Reserve produced the U.S. housing bubble that is at the core of today's financial mess.

The second, and far more credible, explanation agrees that it was indeed lower interest rates that spawned the speculative euphoria. However, the interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages. Between 2002 and 2005, home mortgage rates led U.S. home price change by 11 months. This correlation between home prices and mortgage rates was highly significant, and a far better indicator of rising home prices than the fed-funds rate.
[...]
U.S. mortgage rates' linkage to short-term U.S. rates had been close for decades. Between 1971 and 2002, the fed-funds rate and the mortgage rate moved in lockstep. The correlation between them was a tight 0.85. Between 2002 and 2005, however, the correlation diminished to insignificance."

Right.

"Gee, Ma. I know I loaded the gun. And, well, I did pull the trigger. But I didn't kill that guy. It was the chemical reaction in the gunpowder that produced a high-velocity projectile that suddenly reversed it's momentum because of the resistance offered by flesh, which produced a hole..."

Somehow a "tight correlation" that persisted for 30 years just dissolved, because... well, because Alan Greenspan says so. Odd how an amoral technocrat feels the need to justify his actions.

3/13/2009 05:07:00 pm  
Blogger Berend de Boer said...

I must admit that the last year has turned me into a full Austrian as well. Before I was somewhat cynical, but you can't argue with the facts. there were people who were right and wrong.

And there is a theory that explains why booms and busts happens, and where exactly in the economy this is manifested.

3/13/2009 09:57:00 pm  

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