An Austrian Take on the Credit Crunch
A reader has requested that I share any Austrian analyses of the current credit crunch that I’ve run across (for those of you wondering why Arnold Schwarzenegger has anything to do with the financial markets, I’m referring of course to the Austrian School of economics as developed by Mises, Hayek, Rothbard, and certain other libertarian thinkers).
Now, I’m not well-versed enough in finance to be able to comment on the technical details of the following pieces, but I can summarize them as follows: the current problems in the financial markets and the overall economy are the result of deviations from the free market by a meddling government. The mandated use of fiat money, credit injections (money out of thin air) by the Fed, and other anti-market measures, rather than smoothing out boom-bust cycles of the free market as their proponents claim, have in fact been causing the cycles and making the resulting recessions more severe and prolonged than anything a truly free market would produce. The market is naturally self-correcting, but the Fed and other central banks around the world have been wreaking havoc on the market processes that would otherwise be making us prosperous with only minimal business cycles.
Enjoy!
The Worst Recession in 25 years?
And here’s a good reading list for the Austrian view of finance and central banking in general: Readings for the Crisis
If anyone has any expertise in this field (Jimmy), or even if you don’t, feel free to discuss these items in the comments–you can even include your own links to good resources.
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Comments
Comment from Darren
Time: November 12, 2007, 11:39 pm
Well, I’m with you on the impending financial ruin being brought about by the war. But are you suggesting that the dollar would be just fine if not for the war? Is it not preferable to have money 1) that has value independent of that derived from the confidence people have in the government that backs it, and 2) the supply and demand of which is determined purely from the self-correcting give and take of the free market rather than by inherently flawed and distorting dictates from a centralized power?
Comment from Mark
Time: November 14, 2007, 1:08 pm
Of course it’s preferable to have money with independent value. However, a pure gold standard in and of itself is insufficient to smooth the economic cycle. The problem with gold is deflation rather than inflation- but the result in each case is still going to be a boom/bust sort of thing. At some point, someone will probably come up with something that is naturally and automatically pegged to economic growth. But until that point, wise management of the monetary supply is probably the best we can do, IMHO. See my post from this morning for more: http://publiusendures.blogspot.com/2007/11/weaknesses-of-gold-standard.html
Of course, the key to all this is that the management of the supply must be wise, which is asking a tremendously large amount from humans: the Fed faces tremendous political pressures to act imprudently, and government deficit spending, especially as caused by the war, is unfortunately a fact of life since politicians only care about the economy for the period of time until their next election.
Comment from Darren
Time: November 14, 2007, 10:55 pm
Thanks for the thoughts and the link, Mark. I’m not wedded to the idea of using gold, but I still think unleashing the free market to work its magic on money is bound to have better results than allowing a central bank to manage it. If smoothing the cycles is truly so crucial, so valuable to the economy, then it seems to me there is enormous incentive for clever market participants to come up with ways to do through the voluntary processes of the market.
Comment from Ben
Time: November 11, 2007, 8:54 pm
Let me correct the mistake of fiat money. The dollar and gold have value for the same reason. People want it. The value(price) of both gold and the dollar are due to supply and demand. What is nice about the dollar is that we can control the supply. There is no control of the gold supply. We cannot make more gold to cover an increase in supply. We use the dollar to measure prices. The reason that we use the dollar and not something else is because it is stable. If it were unstable we would use some other common good (like gold). Now there is a problem with the dollar - it is not stable. The war spending has some people worried that the US government will increase the supply of dollars to pay for the war. This would cause the value of the dollar to drop and everything measured in dollars would have to be revalued(raise prices). People do not like it when your raise prices. They will go to your competitor. The war is destroying the dollar. The dollar is our biggest export. People are looking for alternatives to the dollar. The demand for the dollar is falling. The supply is either staying the same or increasing. Inflation is imminent if not already happening. The war is going to destroy our economy - and fast. It may not recover. If the euro becomes the dominant world currency, the dollar will be dead.