Aware that capitalist systems are inherently unstable and prone to cycles and believing these cycles would play a role in its demise, the spirit of Karl Marx must be glowing in satisfaction knowing that Krugman and others have pretty much dismissed the Austrian school of economics as something quaint and slightly anachronistic; the works of Frederick Hayek and Ludwig Von Mises were not mentioned in the opus on contemporary economic thought.
In light of what has taken place and the failures of the received wisdom offered by the larger schools of economic thought, makes it the more surprising; the Austrian school correctly saw the approaching economic train wreck and presciently anticipates the policies to revive the moribund economy. Whether the S&L crisis, the emerging market crisis, the South American debt crisis, the market crash of 1987, the dot.com crisis or the most recent implosion, the policy response is the same: more liquidity. Had Marx lived at a different time, he would have surely realized the greatest threat to capitalism would be in irresponsible and corrupt fiscal policies and convulsive monetary policy.
“When money creation is sustained, a financial bubble begins to feed on itself, higher prices allowing the owners of inflated titles to spend and borrow more, leading to more credit creation and to even higher prices. As prices get distorted, malinvestments, or investments that should not have been made under normal market conditions, accumulate. Despite this, financial institutions have an incentive to join this frenzy of irresponsible lending, or else they will lose market shares to competitors.
With “liquidities” in overabundance, more and more risky decisions are made to increase yields and leveraging reaches dangerous levels. During that manic phase, everybody seems to believe that the boom will go on. Only the Austrians warn that it cannot last forever, as Friedrich Hayek and Ludwig von Mises did before the 1929 crash, and as their followers have done for the past several years.”
In my mind these two paragraphs offer more insight into the underlying causes of the great recession than do any of the oblique comments offered by either Greenspan or Bernanke. This notwithstanding, Bernanke is has been awarded a second term and is widely regarded as the man who helped avoid total financial collapse. And rather than deal with toxic loans, other malinvestments, structural imbalances, true regulatory reform, improving transparency and scaling down the size banking behemoths, we’ll simply balloon a new bubble.
Economics and Its Discontents [View article]
In light of what has taken place and the failures of the received wisdom offered by the larger schools of economic thought, makes it the more surprising; the Austrian school correctly saw the approaching economic train wreck and presciently anticipates the policies to revive the moribund economy. Whether the S&L crisis, the emerging market crisis, the South American debt crisis, the market crash of 1987, the dot.com crisis or the most recent implosion, the policy response is the same: more liquidity. Had Marx lived at a different time, he would have surely realized the greatest threat to capitalism would be in irresponsible and corrupt fiscal policies and convulsive monetary policy.
“When money creation is sustained, a financial bubble begins to feed on itself, higher prices allowing the owners of inflated titles to spend and borrow more, leading to more credit creation and to even higher prices. As prices get distorted, malinvestments, or investments that should not have been made under normal market conditions, accumulate. Despite this, financial institutions have an incentive to join this frenzy of irresponsible lending, or else they will lose market shares to competitors.
With “liquidities” in overabundance, more and more risky decisions are made to increase yields and leveraging reaches dangerous levels. During that manic phase, everybody seems to believe that the boom will go on. Only the Austrians warn that it cannot last forever, as Friedrich Hayek and Ludwig von Mises did before the 1929 crash, and as their followers have done for the past several years.”
In my mind these two paragraphs offer more insight into the underlying causes of the great recession than do any of the oblique comments offered by either Greenspan or Bernanke. This notwithstanding, Bernanke is has been awarded a second term and is widely regarded as the man who helped avoid total financial collapse. And rather than deal with toxic loans, other malinvestments, structural imbalances, true regulatory reform, improving transparency and scaling down the size banking behemoths, we’ll simply balloon a new bubble.