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Thursday, October 09, 2008
George Bragues: "An important victory for the Austrian school of economics"
After publishing a piece by Martin Masse about the Austrian economists' diagnosis of the current financial crisis (and the bailout bill as further implementation of the fifth plank of Karl Marx's Communist Manifesto), the National Post has another op-ed with an Austrian perspective on the business cycle by George Bragues, Business Program Head at the University of Guelph-Humber:
While there isn't perfect unanimity on this, it is widely acknowledged that a significant part, if not the root, of our difficulties originated with the low-interest-rate policy implemented by the Alan Greenspan-led Fed in 2001-2005. This generated a housing boom, which was further stoked by the financial engineering of Wall Street in securitizing mortgages, by obliging bond rating agencies in evaluating these securities and by portfolio managers eagerly willing to buy them, hungry for extra returns in a low interest rate environment.
To the extent that this assessment has been made, it represents an important victory for a school of thought that has long hung on the margins of the economics discipline: the Austrian school of economics, whose most illustrious figures include the Nobel prize winning Friedrich von Hayek and Ludwig von Mises. Austrian economists hold that downturns are the inevitable aftermath of loose monetary policy, thus opposing explanations typically heard prior to the current crisis that attributed recessions to price shocks, underconsumption or central bank tightening of monetary policy.
But if, to rephrase a well-known Nixon quote, we are all Austrians now, it illogically only extends to the diagnosis of the crisis and not to the school's market-based cure. For it is just not consistent to simultaneously assign blame to Greenspan's easy money and then support government intervention to fix the damage, as so many of the business op-ed writers and talking heads on CNBC have.
As the Austrian tradition points out, the dilemma with easy money is that the central bank sets rates below that which the market would naturally set. The natural rate reflects people's willingness to trade present for future satisfactions. When the actual rate is established under this, entrepreneurs and firms are issued a false signal that people are willing to defer more consumption into the future than they really are. As a result, excess investments in capital goods industries, such as housing, are made on the expectation that these will pay off in the long-run. The boom ends when monetary conditions are tightened back to natural levels or the passage of time makes clear that the demand was never really there to sustain the investments made. At this point, a crisis takes place in which capital investments get liquidated and resources are shifted such that the economy's productive capacity more appropriately reflects people's time preferences.
Posted by Kalim Kassam on October 9, 2008 | Permalink
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Comments
"The power to determine the quantity of money...is too important, too
pervasive, to be exercised by a few people, however public-spirited, if there
is any feasible alternative. There is no need for such arbitrary power...Any
system which gives so much power and so much discretion to a few men, [so] that
mistakes - excusable or not - can have such far reaching effects, is a bad
system. It is a bad system to believers in freedom just because it gives a few
men such power without any effective check by the body politic - this is the
key political argument against an independent central bank.''
-- Milton Friedman
(1912-2006) Nobel Prize-winning economist, economic advisor to President Ronald Reagan, "ultimate guru of the free-market system"
And the market just keeps sliding. Looks like the Bail Out Band Aid was just a little too late to save the patient.
Posted by: JC | 2008-10-10 5:49:20 AM
No need for worry folks, Pres. Bush is going to make a "statement". I feel better already.
updated 2 hours ago
WASHINGTON - As the stock market plunged to its lowest level in five years, the White House on Thursday sought to assure anxious Americans that the United States is working aggressively to stabilize the nation's chaotic financial system.
In a new effort to calm the crisis, President Bush will make a statement on the economy Friday in the Rose Garden. Bush is not expected to announce any new policy decisions, White House press secretary Dana Perino said.
"He will assure the American people that they should be confident that economic officials are aggressively taking every action to stabilize our financial system," Perino said. "The Treasury Department, the Federal Reserve and the FDIC all have the necessary tools to address the problems we are facing.
What it should say is that the Fed and the FDIC ARE the tools that CAUSED the problems we are facing...
Posted by: JC | 2008-10-10 6:35:09 AM
What it should say is that the Fed and the FDIC ARE the tools that CAUSED the problems we are facing...
Posted by: JC | 10-Oct-08 6:35:09 AM
Gee, now deposit insurance is part of the problem. If we could only get rid of that darned fiat currency and base our money on sugar or salt or walnuts, or maybe even maple syrup, everything would be A OK. In fact let gets rid of money altogether and move back to a barter system.
Posted by: The Stig | 2008-10-10 8:08:53 AM
Sorry Stig, but its painfully obvious fiat currency is a time bomb. Can you offer any solutions or only criticism?
Posted by: JC | 2008-10-10 9:56:48 AM
Sorry Stig, but its painfully obvious fiat currency is a time bomb. Can you offer any solutions or only criticism?
Posted by: JC | 10-Oct-08 9:56:48 AM
My solution is let the markets work. When countries increase money supply without any corresponding increase in GDP the currency will eventually collapse. What's happening now has happened before. Brazil, Mexico, Thailand, Sweden, etc. The only difference now is scale. You want to go to a commodity based currency. Like say oil? It's lost 45% of it's value in the last 3 months. Gold has appreciated 8% this week. So what do you want to use? My solution is to let the markets work. I'll repeat it again for you. Let the markets work.
Posted by: The Stig | 2008-10-10 10:23:53 AM
Let the markets work.
Posted by: The Stig | 10-Oct-08 10:23:53 AM
Fair enough. I would have to agree with that.
BUT...no....NO Government involvement...NONE!
And then maybe even a fiat currency would have a chance.
Posted by: JC | 2008-10-10 2:48:27 PM
No question that a large compnent of what is happening is a traditional business cycle, whcih is needed to cleans the imbalances, waste and corruption.
The Austrian school got it right. This is a first order event, not a 3rd order side event as Obama and his cronies are claiming.
Posted by: mEHDI | 2008-10-10 5:48:04 PM
Yes, the Austrians are right. Hence my question: What's the exit strategy?
We had better start asking it now, because the longer the government has its fingers in the till, the more financial disturbances we are going to see later...
Posted by: Grant Brown | 2008-10-11 12:08:42 AM
That's a good question Grant, and though I haven't got much expertise I'll take an initial crack at it.
The first step is to recognize that a deep recession is both unavoidable and neccesary. Bad debt must be liquidated for the economy to regain solid footing.
An optimal response would first include steps to get people to start investing and lending again.
1)A promise of no more bailouts for anyone and that insolvent companies would be allowed to fail. This will ensure that those holding onto worthless assets actively look for private sector buyers rather than waiting for mommy government to come along with a sugary deal.
2)Massive deregulation to allow credit strapped companies to find the lenders and buyers who are out there with capital (start with repealing Sarbanes-Oxley). Michael Rozeff explains better than I could: http://www.lewrockwell.com/blog/lewrw/archives/023416.html
3) Elimination of the the capital gains tax, this would unleash a whole lot of money from people would now be willing to invest money into companies including those in the mortgage, insurance, and banking sectors.
After the pains have been eased by these actions, next steps would include further liberalization of the economy and actions taken to prevent the creation of another artificial boom.
1) A significant reduction of government spending involving Departments being eliminated and a phased withdrawal from Iraq.
2) Privatization of Fannie + Freddie
3) Real action on Social Security, Medicare and other entitlement programs.
Monetary transition is much harder for me to figure out. The end goal should of course be the elimination of the central bank – someone like Ron Paul should be appointed to head a new Gold Commission, research the issue and provide recommendations for transition. Steps taken on the currency by the US will likely be emulated by other countries–or at least it they will have to be reacted to.
They may recommend something like that the Treasury resume control over the currency (i.e. abolish the Fed) and a dollar revaluation take place based partially on current US gold reserves.
If complete monetary privatization were their goal, since capital gains taxes have been already eliminated on gold and other commodities, they would then have to eliminate legal tender laws allowing enforceable contracts in any currency and allow taxes to be payable in gold and possibly a few other standard currencies.
The best we can hope for politically is probably some reduction in the rate of spending increases and a balanced budget. The worst to fear is the continuation of the presumption that housing prices cannot be allowed to fall, that financial institutions cannot be allowed to fail, further nationalization of the private sector and a much lengthened depression. Also if further injections of credit by the Fed (which will soon run out of assets to sell) continue, this will soon become hugely inflationary. At this point wage and price controls might be imposed but that would not stave off the possibly of hyperinflation and a complete currency collapse.
Posted by: Kalim Kassam | 2008-10-11 1:43:57 AM
Right On Kalim! I have a whole new level of respect for you. Keep up the good work. :)
Posted by: JC | 2008-10-11 9:27:57 AM
someone like Ron Paul should be appointed to head a new Gold Commission,........................
They may recommend something like that the Treasury resume control over the currency (i.e. abolish the Fed) and a dollar revaluation take place based partially on current US gold reserves.
Posted by: Kalim Kassam | 11-Oct-08 1:43:57 AM
Bwahahahahaha. And who's going to set the price of gold? Or any other commodity that you want this "new" currency based on, the US government? I'm sure all commodity producers are eagerly waiting to hand over pricing to the US government. Bwahahahaha
What happens if South Africa , Russia and Canada who are the worlds major gold producers don't go along? Or oil producers? BTW. There isn't enough gold bullion in the world now to cover the the US currency. So what is Europe and Asia going to base their currencies on? Dream on libertarians, dream on.
Posted by: The Stig | 2008-10-11 12:40:55 PM
What happens if South Africa , Russia and Canada who are the worlds major gold producers don't go along? Or oil producers? BTW. There isn't enough gold bullion in the world now to cover the the US currency. So what is Europe and Asia going to base their currencies on? Dream on libertarians, dream on.
Posted by: The Stig | 11-Oct-08 12:40:55 PM
Obviously some one with a vested interest in the status quo. Never any solutions just criticism.
No imagination whatsoever...just negativity ad nauseum.
Posted by: JC | 2008-10-11 12:50:57 PM
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