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The article has some good points, but Paul Krugman does too. The modern "keynesian" view that the Great Depression was caused by very bad policy of the Fed (kee

by miloshh 18y ago

The article has some good points, but Paul Krugman does too. The modern "keynesian" view that the Great Depression was caused by very bad policy of the Fed (keeping very high interest rates and desperately clinging to the gold standard) seems very close to the truth. But, on the other hand, the people running the Fed now, trying to avoid the mistakes of that era, might be going to the other extreme of keeping interest rates too low and printing too much money.While that might make the current recession relatively short and mild, it will prepare the ground for further bubbles - people, worried about their cash losing value, will invest like sheep into the next big thing, until it bursts again. So, maybe the right balance is somewhere between "keynesian" and "austrian"?

wealthdynamics 18y ago
One key piece to remember is that in true austrian theory, the central bank has no place as that is an attempt at free market regulation which is utterly impossible (see book "I, Pencil" as an example of the difficulty in truly understanding and regulating a free market). The bad policy of th Fed itself was NOT within austrian theory but caused by the introduction of the Fed in 1913 to "quelch" financial instability (what good that did, as expected).
deleted 18y ago
[deleted]
bokonist 18y ago
Artificial debt inflation is like heroin. The Keynesians correctly pointed out that going off of heroin causes you a heck of a lot of pain. Therefore, their solution is to never stop shooting heroin. Their cure for withdrawal is more heroin. This is good in the short term, but fatal in the long term. Unfortunately, the Keynesians deny that shooting heroin can even be a problem. The Austrian position is that 1) we should not start using heroin in the first place and 2) if we find ourselves on it, we should quit cold turkey. This may be a good idea for a mild debt (heroin) dependency, but after the inflation of World War I and the 1920's or the inflation we've had the past few decades, going cold turkey causes a great depression. Therefore, I'd prefer we'd check into a methadone clinic, gradually wean ourselves off the heroin, and make sure to never shoot up again. Not very likely to ever happen.
sridharvembu 18y ago
While [printing too much money] might make the current recession relatively short and mild ... That is by no means assured. Right now, we are in truly uncharted territory economically. My prediction is that theories are going to be rewritten.
- rast 18y ago
  My prediction is that the old theories will prove perfectly adequate to describe where we're going: But, though we had plenty of money, there was nothing our money could buy, And the Gods of the Copybook Headings said: "If you don't work you die." http://www.olimu.com/readings/GodsOfTheCopybookHeadings.htm http://www.olimu.com/readings/GodsOfTheCopybookHeadings.htm
Prrometheus 18y ago
Part of the problem is that the central bank only measures inflation by consumer prices, and not investment asset prices. As long as consumer prices rise slowly, central bankers feel no hesitation in following loose monetary policy. This is true even as stocks and real estate prices take off into the stratosphere, causing potential instability.
- sridharvembu 18y ago
  Recently, Bernanke seems to have come around to accepting that asset prices are important to monetary policy, breaking a long-held Fed orthodoxy, dating back to Greenspan. Contrast his speech in 2002, where he outlines the"don't burst a bubble but clean up the aftermath" philosophy: http://www.federalreserve.gov/BoardDocs/Speeches/2002/20021015/default.htm http://www.federalreserve.gov/BoardDocs/Speeches/2002/200210... with this recent speech in October 2008: http://business.smh.com.au/business/bernanke-signals-new-approach-to-bubbles-20081017-52kv.html http://business.smh.com.au/business/bernanke-signals-new-app...

by miloshh 18y ago

wealthdynamics 18y ago

One key piece to remember is that in true austrian theory, the central bank has no place as that is an attempt at free market regulation which is utterly impossible (see book "I, Pencil" as an example of the difficulty in truly understanding and regulating a free market). The bad policy of th Fed itself was NOT within austrian theory but caused by the introduction of the Fed in 1913 to "quelch" financial instability (what good that did, as expected).

deleted 18y ago

[deleted]

bokonist 18y ago

Artificial debt inflation is like heroin. The Keynesians correctly pointed out that going off of heroin causes you a heck of a lot of pain. Therefore, their solution is to never stop shooting heroin. Their cure for withdrawal is more heroin. This is good in the short term, but fatal in the long term. Unfortunately, the Keynesians deny that shooting heroin can even be a problem. The Austrian position is that 1) we should not start using heroin in the first place and 2) if we find ourselves on it, we should quit cold turkey. This may be a good idea for a mild debt (heroin) dependency, but after the inflation of World War I and the 1920's or the inflation we've had the past few decades, going cold turkey causes a great depression. Therefore, I'd prefer we'd check into a methadone clinic, gradually wean ourselves off the heroin, and make sure to never shoot up again. Not very likely to ever happen.

sridharvembu 18y ago

While [printing too much money] might make the current recession relatively short and mild ... That is by no means assured. Right now, we are in truly uncharted territory economically. My prediction is that theories are going to be rewritten.

rast 18y ago
My prediction is that the old theories will prove perfectly adequate to describe where we're going: But, though we had plenty of money, there was nothing our money could buy, And the Gods of the Copybook Headings said: "If you don't work you die." http://www.olimu.com/readings/GodsOfTheCopybookHeadings.htm http://www.olimu.com/readings/GodsOfTheCopybookHeadings.htm

Prrometheus 18y ago

Part of the problem is that the central bank only measures inflation by consumer prices, and not investment asset prices. As long as consumer prices rise slowly, central bankers feel no hesitation in following loose monetary policy. This is true even as stocks and real estate prices take off into the stratosphere, causing potential instability.

sridharvembu 18y ago
Recently, Bernanke seems to have come around to accepting that asset prices are important to monetary policy, breaking a long-held Fed orthodoxy, dating back to Greenspan. Contrast his speech in 2002, where he outlines the"don't burst a bubble but clean up the aftermath" philosophy: http://www.federalreserve.gov/BoardDocs/Speeches/2002/20021015/default.htm http://www.federalreserve.gov/BoardDocs/Speeches/2002/200210... with this recent speech in October 2008: http://business.smh.com.au/business/bernanke-signals-new-approach-to-bubbles-20081017-52kv.html http://business.smh.com.au/business/bernanke-signals-new-app...