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mises
Joined: 05 Nov 2007
Location: retired
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 Posted: Tue Sep 30, 2008 7:01 am Post subject: Austrian Econ in the FP |
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Marx's Proposal Number Five seems to be the leading motivation for those backing the Wall Street bailout
In his Communist Manifesto published in 1848, Karl Marx proposed 10 measures to be implemented after the proletariat takes power, with the aim of centralizing all instruments of production in the hands of the state. Proposal Number Five was to bring about the "centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly."
If he were to rise from the dead today, Marx might be delighted to discover that most economists and financial commentators, including many who claim to favour the free market, agree with him.
Indeed, analysts at the Heritage and Cato Institute, and commentators in the Wall Street Journal and on this very page, have made declarations in favour of the massive "injection of liquidities" engineered by central banks in recent months, the government takeover of giant financial institutions, as well as the still stalled $700-billion bailout package. Some of the same voices were calling for similar interventions following the burst of the dotcom bubble in 2001.
"Whatever happened to the modern followers of my free-market opponents?" Marx would likely wonder.
At first glance, anyone who understands economics can see that there is something wrong with this picture. The taxes that will need to be levied to finance this package may keep some firms alive, but they will siphon off capital, kill jobs and make businesses less productive elsewhere. Increasing the money supply is no different. It is an invisible tax that redistributes resources to debtors and those who made unwise investments.
So why throw this sound free-market analysis overboard as soon as there is some downturn in the markets?
The rationale for intervening always seems to centre on the fear of reliving the Great Depression. If we let too many institutions fail because of insolvency, we are being told, there is a risk of a general collapse of financial markets, with the subsequent drying up of credit and the catastrophic effects this would have on all sectors of production. This opinion, shared by Ben Bernanke, Henry Paulson and most of the right-wing political and financial establishments, is based on Milton Friedman's thesis that the Fed aggravated the Depression by not pumping enough money into the financial system following the market crash of 1929.
It sounds libertarian enough. The misguided policies of the Fed, a government creature, and bad government regulation are held responsible for the crisis. The need to respond to this emergency and keep markets running overrides concerns about taxing and inflating the money supply. This is supposed to contrast with the left-wing Keynesian approach, whose solutions are strangely very similar despite a different view of the causes.
But there is another approach that doesn't compromise with free-market principles and coherently explains why we constantly get into these bubble situations followed by a crash. It is centered on Marx's Proposal Number Five: government control of capital.
For decades, Austrian School economists have warned against the dire consequences of having a central banking system based on fiat money, money that is not grounded on any
commodity like gold and can easily be manipulated. In addition to its obvious disadvantages (price inflation, debasement of the currency, etc.), easy credit and artificially low interest rates send wrong signals to investors and exacerbate business cycles.
Not only is the central bank constantly creating money out of thin air, but the fractional reserve system allows financial institutions to increase credit many times over. 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.
Now, what should be done when that pyramidal scheme starts crashing to the floor, because of a series of cascading failures or concern from the central bank that inflation is getting out of control? It's obvious that credit will shrink, because everyone will want to get out of risky businesses, to call back loans and to put their money in safe places. Malinvestments have to be liquidated; prices have to come down to realistic levels; and resources stuck in unproductive uses have to be freed and moved to sectors that have real demand. Only then will capital again become available for productive investments.
Friedmanites, who have no conception of malinvestments and never raise any issue with the boom, also cannot understand why it inevitably leads to a crash. They only see the drying up of credit and blame the Fed for not injecting massive enough amounts of liquidities to prevent it.
But central banks and governments cannot transform unprofitable investments into profitable ones. They cannot force institutions to increase lending when they are so exposed. This is why calls for throwing more money at the problem are so totally misguided. Injections of liquidities started more than a year ago and have had no effect in preventing the situation from getting worse. Such measures can only delay the market correction and turn what should be a quick recession into a prolonged one.
Friedman-- who, contrary to popular perception, was not a foe of monetary inflation, but simply wanted to keep it under better control in normal circumstances -- was wrong about the Fed not intervening during the Depression. It tried repeatedly to inflate but credit still went down for various reasons. This is a key difference in interpretation between the Austrian and Chicago schools.
As Friedrich Hayek wrote in 1932, "Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion. ... To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about ..."
The confusion of Chicago school economics on monetary issues is so profound as to lead its adherents today to support the largest government grab of private capital in world history. By adding their voices to those on the left, these confused free-marketeers are not helping to "save capitalism", but contributing to its destruction.
- Martin Masse is publisher of the libertarian webzine Le Quebecois Libre and a former advisor to Industry minister Maxime Bernier. |
http://www.financialpost.com/story.html?id=849277&p=3
I believe the Austrians have demonstrated that their ideas regarding the business cycle, inflation and central banking are more useful than the currently dominant paradigm.
(I changed the title of the tread as Karl's comback was silly)
Last edited by mises on Tue Oct 07, 2008 10:26 am; edited 1 time in total |
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Ya-ta Boy
Joined: 16 Jan 2003
Location: Established in 1994
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| Posted: Tue Sep 30, 2008 7:26 am Post subject: |
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Are you suggesting that if the US gets its act together we could be the first modern (post-modern?) Communist country and lead the world into the workers' paradise?
Pardon me for feeling you and the Austrians are fighting last century's battle. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Tue Sep 30, 2008 8:49 am Post subject: |
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| Sorry, no. The Austrians are the ones who warned of this, who screamed about it and who have been right all along. It is you who is fighting an ideological battle, not us. We want a system that works, that is stable and that doesn't create inequality on the backs of middle and lower classes. |
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ontheway
Joined: 24 Aug 2005
Location: Somewhere under the rainbow...
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| Posted: Tue Sep 30, 2008 8:55 am Post subject: |
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Mises, thank you for posting that.
Funny how it matches what I was writing on other threads.
Funny how other people who cannot comprehend the meaning of what is written here and by me try to make pointless comments.
All of the analysis of the Austrian school is correct.
The others cannot explain what has happened, nor what is happening currently and have failed in all their predictions.
The Austrian school has explained completely what has happened, what is happening currently and has predicted these events well in advance, while the others look on dumbfounded and clueless. |
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Ya-ta Boy
Joined: 16 Jan 2003
Location: Established in 1994
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| Posted: Tue Sep 30, 2008 1:38 pm Post subject: |
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| The Austrians are the ones who warned of this |
Does that mean my old granny deserves a school of economics all of her own? She always said, "Don't buy what you can't pay for." Anyone with that as a base could (and did) predict the present problem. It isn't rocket science. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Tue Sep 30, 2008 1:42 pm Post subject: |
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| Why don't you read some of the central books and then get back to me. Given what you seem concerned with via your posts here, I think you will find yourself nodding your head in agreement page after page after page. Don't be dismissive because you dislike Ron Paul. |
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Ya-ta Boy
Joined: 16 Jan 2003
Location: Established in 1994
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| Posted: Tue Sep 30, 2008 2:28 pm Post subject: |
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I wonder if your Austrians are related to these Austrians...
Far-Right's showing in Austria's election is worrying
The clear lesson for Europe's mainstream politicians is to compete, not to collaborate. Voters like a choice between sensible parties. When they don't get it, they will vote for silly ones.
http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2008/09/30/do3003.xml
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| Given what you seem concerned with via your posts here, I think you will find yourself nodding your head in agreement page after page after page. Don't be dismissive |
I really wasn't being dismissive with my comment about my granny. She really did say it and I really do believe it. It's just common sense. What isn't common sense is to return to old failed approaches (gold standard) to solve current problems. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Tue Sep 30, 2008 2:35 pm Post subject: |
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What is happening in Austria is very worrying. It is also happening in Italy and the UK. European populations are rejecting mass immigration from muslim states, multiculturalism and the EU. Their ruling elites dismiss these ideas and call their people names. The people are now turning to far-right political organizations. I have said this will happen for years. It sucks being right all the damn time. You cannot replace one nation with another via unwanted immigration and not get some push-back.
The Austrian school of economist is named so because the first thinkers were immigrants to the US from Austria. |
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ontheway
Joined: 24 Aug 2005
Location: Somewhere under the rainbow...
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| Posted: Wed Oct 01, 2008 8:38 am Post subject: |
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Yata, you should take the advice and read something before you post silliness.
The gold standard NEVER has failed.
There has never been any significant inflation and there has never been a recession while the US was on a gold standard.
Every recession and depression in US history has happened when and because the US went off the gold standard.
There are no exceptions.
The Austrian school has shown this.
The Austrian school of economics and the Libertarian political philosophy, now being taught as the Science of Liberty, are the only new ideas on the economic and political scene. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Tue Oct 07, 2008 10:24 am Post subject: |
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More, and this time again from the FP:
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Paulson's scheme
The current financial crisis represents an important victory for an oft-overlooked school of thought: The Austrian school of economics
So much for all those predictions that the markets would begin to recover once members of the U. S. House of Representatives summoned the courage to resist the populist outcry and vote for Hank Paulson's $700-billion rescue plan. Whatever the excitement it generated, and the disappointment its original rejection by Congress caused, the market appears to have arrived at a more considered view of the U. S. Treasury Secretary's scheme. Sadly, the market's negative verdict is on the mark.
To understand this, we have to unravel the contradiction infecting much of the commentary and analysis regarding the current financial crisis. 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.
As we are witnessing now, this stage is not pretty, since the banks and creditors who financed the boom activities see the value of their loan assets impaired, forcing them to restrict credit to even credit-worthy customers. Financial institutions that became heavily exposed to the boom activities either go bust, like Lehman Brothers, or they become prey, as Merrill Lynch did to Bank of America, and to those who wisely minimized their participation in the bad investments. Depositors start to doubt the security of their funds and bank runs become a threat. This is, to be sure, less of a problem now thanks to government deposit insurance, though this security blanket comes at the price of giving banks incentives to take undue risk with the and thereby gain the confidence to provide credit to worthy customers at more normal interest rate spreads to government debt.
This stratagem would represent an authentic liquidation if the banks were to sell their mortgage debt at its real present value and the government, in turn, had no compunction in pursuing foreclosures on non-performing loans, no matter what the impact on house prices. But, as hinted by CIBC's recent deal with Cerberus to reduce its exposure on US$1.05-billion in problem mortgages, there is a sea of cash sitting in private equity, hedge and vulture funds waiting to buy distressed securities if the price is right. That they haven't bought much yet suggests the banks are resisting lowering their price. There being pressure to expedite the transfer of securities and assist the banks, the government is very likely to acquiesce to this resistance, pay above market and effectively institute a price support mechanism for mortgage assets.
Besides the public relations mess of having a throng of failed borrowers compelled to give up their homes by a government agency, the fear of contributing further to the decline in the real estate market means foreclosures will probably be kept to a minimum. In this way, the Paulson scheme will also turn into a price support regime for housing.
Most commentators resist following the Austrian logic through to the end out of the fear of repeating the policy mistakes that led to the Great Depression. This reflects the orthodox interpretation of that period, according to which the economy fell apart in the early 1930s while U. S. president Herbert Hoover took a laissez-faire approach to the downturn and the Fed ran an overly tight monetary policy.
The truth is that the Fed at the time did try to add liquidity, lowering its rediscount rate until late 1931 and continuously increasing reserves under its control. Money supply nevertheless fell, but that was because people lost faith in the financial system and hoarded currency. Meanwhile, Hoover met the downturn with interventionist gusto. He passed the Smoot-Hawley tariff to help domestic industries and obtained the co-operation of business leaders to support wages and investment. We haven't gone down this protectionist and corporatist road yet but Hoover's attacks on short selling and his creation of the Reconstruction Finance Corporation, which among other things loaned money to banks, bear an eerie resemblance to the current policy response.
"We might have done nothing",Hoover said, "[but] we determined that we would not follow the advice of the bitter-end liquidationists." Thus has the Bush administration decided as well, having successfully cajoled a recalcitrant Congress to follow Hoover's example.
-George Bragues is Program Head of Business at the University of Guelph-Humber in Toronto. |
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ontheway
Joined: 24 Aug 2005
Location: Somewhere under the rainbow...
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| Posted: Tue Oct 07, 2008 11:22 am Post subject: |
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The truth is that the Fed at the time did try to add liquidity, lowering its rediscount rate until late 1931 and continuously increasing reserves under its control. Money supply nevertheless fell, but that was because people lost faith in the financial system and hoarded currency. Meanwhile, Hoover met the downturn with interventionist gusto. He passed the Smoot-Hawley tariff to help domestic industries and obtained the co-operation of business leaders to support wages and investment. We haven't gone down this protectionist and corporatist road yet but Hoover's attacks on short selling and his creation of the Reconstruction Finance Corporation, which among other things loaned money to banks, bear an eerie resemblance to the current policy response.
"We might have done nothing",Hoover said, "[but] we determined that we would not follow the advice of the bitter-end liquidationists." Thus has the Bush administration decided as well, having successfully cajoled a recalcitrant Congress to follow Hoover's example. |
-George Bragues is Program Head of Business at the University of Guelph-Humber in Toronto.
Just as I've been explaining over, and over, and over to Yata et al
The Fed did it in the First Great Depression and again, now, in the Second Great Depression.
Hoover intervened, as Bush is doing now, with the Fed and made things worse.
The Smoot-Hawley tariff caused the Stock Market Crash, and both followed the onset of a recession that FDR turned into the First Great Depression.
Hayek gave some great lectures on this when I was a student. |
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