Martin Masse wrote: >... 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.< I've always wondered about this. How can the Austrians and Friedmaniacs think that a banker-dominated organization like the Federal Reserve would deliberately manipulate the money supply to cause inflation, debasement of the currency, etc.? Bankers don't like inflation at all. They'd much rather see high unemployment, since inflation reduces the purchasing power of their financial assets. >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.< He's against fractional reserve banking? if it were banned, how would banks make profits? They wouldn't be able to use short-term money (deposits) paying very low interest rates to make longer-term loans at higher interest rates. If they can't do that, they'd have to act like finance companies and they'd expand credit anyway. Okay, we could ban leverage. Maybe that's a good idea, but I doubt that self-styled libertarians would like it. Besides, the deflation that would result would likely be quite unpleasant. >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.< It should be mentioned that the US was on the gold standard during the late 1920s and early 1930s. BTW, I wouldn't rely on the Hayek- and Mises-types for predictions about the economic world. They don't believe in using actual numbers in their studies of the economy. It's all a matter of repeating over and over again that "the government doesn't let the market be perfect, so we're going to have a disaster." Since the first is always true -- and will always be so -- they're always predicting disaster. >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.< One point that the Keynesians had against the so-called "Austrians" is that when the economy goes bad what were thought of as being "productive" sectors start being "malinvestments" _after the fact_. The disproportionality that the "Austrians" point to leads to a more general aggregate demand problem (a problem they won't see). That in turn encourages bankruptcy and the like for businesses that had been prosperous and profitable before. >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.< I'd forgotten that the "Austrians" were as bad as crude Marxists in terms of their sense of historical inevitability. > 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.< Actually central banks and governments have often transformed unprofitable investments into profitable ones, again and again. One (very large) micro example: without the government, the military industries wouldn't be profitable. On the macro level, fiscal and monetary policy can increase aggregate demand -- raising the rate of capacity utilization and the rate of turnover of commodities -- and thus raising profit rates. There are limits to this process, of course, but this author should never say never. >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.< the Fed wanted to stick to the gold standard as long as it could -- while purging the economy of "imbalances" following the lead of Treas. Sect. Andrew Mellon -- and thus allowed a lot of deflation. It was only when the bank failures became really bad that we see a reversal and going off of gold. What this fellow is saying is that the problem with the very-"Austrian" efforts of the 1930s is that they didn't go far enough. BTW, Friedman and the so-called "Austrians" were pretty close. Instead of a gold standard, which would likely cause deflation, Friedman wanted a fixed and low rate of growth of the money supply (imposed by constitutional amendment or bayonets if needed) that would imply stable prices. > 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 ..."< well, if the Prophet says so, it must be true. >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.< State-subsidized plutocratic capitalism is still capitalism. -- Jim Devine / "Nobody told me there'd be days like these / Strange days indeed -- most peculiar, mama." -- JL. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
