The Crisis of 2008 with Steve Horwitz With Steve Horwitz

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  • Profile photo of Jeffrey Tucker Jeffrey Tucker

    Walk Away

    Walk Away by Doug French French’s book was greeted with enormous controversy among those who believe in keeping contracts above all else. French, in contrast, argued that it is plainly stupid to continue paying into a house worth a fraction of the contracted mortgage debt. Better to leave the home and give it to the bank than keep being looted. History since 2008 has shown that he was right about this. Kick off the discussion! Questions, comments, observations or elaborations? Either reply here or create a new discussion using the tag Library_Walk Away

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  • Profile photo of Thor Thor

    Hyperstagflation and the Keynesian endgame – beta

    By Thorbjørn Rønje (This article is my first contribution, i.e a test to see how things work in here 🙂 It is a google translation of an article i made in Danish originally) We are in uncharted territory. Even the usually ultra- optimistic Warren Buffet announced the other day out that he does not consider a euro collapse as unthinkable. Peter Schiff, who probably has ” called” dotcom and financial crisis most accurately says distinctive ” We are an indebted family going out for an expensive meal to celebrate getting godkendt for a new credit card . It might feel good (at the time ) , but we’re still simply delaying the Inevitable ” . We look at the same time that more so-called “Black swans ” in games such as unrest in the Middle Eastern oil-producing countries , tsunamis and nuclear snow melts in the world’s third largest economy , rising commodity prices , and continuous ” Quantitative easing ” and global indebtedness. When you are in a situation where the world’s largest economy will have to buy their own government and is otherwise in a hopeless indebted situation to an extent never before seen in history , I do not think it is unreasonable to call into question whether fundamentals in global markets has even improved since 2007. , I will in the following article will give an idea of ​​why the crisis is by no means over, and why it all went so wrong in the first place. With this somewhat dramatic introduction and also violent conclusion I put myself a little at stake, but what the hell ; No pain no gain , here goes : Austrian Business Cycle Theory ( ABCT ) is an extremely interesting piece of theory from the Austrian School , and the only cycle theory has been able to anticipate both the Great Depression [1] and the current financial crisis [2]. Compared to mainstream views on crises have ABCT a radically different view of economic crises fundamental causes, as well as their solutions. I’d introduction , make it a brief outline of ABCT before I will analyze the current financial crisis through a more extensive application of the theory. According to ABCT leads an artificially low interest rate policy to an expansion in the money supply [3] , which is further enhanced through the fractional reserve bank system. This sudden monetary credit enhancement leads to an unsustainable boom as long-term investments are made ​​in sectors that seem like good investments due to the low interest rate. This booms excessive bad investments do all that capital resources are misallokerede against areas of the economy under a stable money supply would not have been attractive . When this excessive increase in the money supply and thus credit can no longer be maintained , it leads according to the theory of a sudden deflationary credit collapse when investors are forced to liquidate projects. In this process, trying economy again to re- allocate capital resources towards sectors of the economy in which they have a more efficient use. The entire economy is now in worse condition than it would have been without credit expansion , the upturn reflects a general period of misinvesteringer has happened at the expense of projects that under a natural rate would have attracted capital resources. Austrian Business Cycle Theory exemplified An economic expansion is only sustainable if it is a result of increased investment based on real savings in the economy , which therefore represents consumers’ actual preferences. If the expansion is not based on real savings , but rather on a credit expansion , this changes drastically on a variety of factors in the economy . ABCT thus explains how a credit expansion results in a distortion of the structure of production and creates a situation in which the supply of capital and consumer goods and services no longer reflects the economic agents’ demand of these . In other words, a temporal misalignment in the economy occur as a consequence of massive expansion money . The current financial crisis is one of many examples of this unfortunate causality : The average American householder experienced between 1998 and 2006 was a boom in the value of his household at 150%. Over the next 2 years they were the very same prices 23% [4] which meant massive defaults and foreclosures. The stock market followed a similar pattern , where the leading index Dow Jones d 7 October 2007 peak of 14,164.53 . The highest ever. 13 months later , d November 20, 2008 , closed the index of 7552.29 . A decline of 46.7 % – the crisis hit. Pensions had been wiped out , unemployment was a sudden rise in [5] and the crisis was developing into more than just a ” subprime crisis ” . Cluster of Errors ? No wonder , when some companies go bankrupt. They may have made ​​a mistake of planning in relation to consumer tastes , overestimated consumer purchasing power , underestimated the cost of complying new social regulation , or any other conceivable error . No one is surprised that this natural market process as it merely reflects the fact that man is unable to predict the future with certainty. But when suddenly violently many companies go bankrupt at the same time , despite the fact that the market has gradually eliminated the contractors who have been at least professionals to produce in line with consumer needs, one must wonder why also companies that have just survived competition and again and again have proved their worth in the market , suddenly everyone sees themselves unable to balance their production to consumer needs. The renowned British economist Lionel Robbins questioned precisely this odd ” cluster of errors” , as he called it , and demanded an explanation : “Why ska the leaders of business in the various industries Producing producenter ‘ goods make errors of judge ment at the same time and in the same direction ? ” [6] Can we find an external denominator for such simultaneous cluster of errors , or is it like Keynes and Marx tried to argue just an inherent consequence of capitalism , ie a so-called market failures ? To answer this question , we find a single trace in the historical fact that recessions hit particularly hard in the capital-goods industries , or ” higher order goods” under Austrian capital theory , such as the commodity sector , construction, capital equipment , etc. but hits less severely in the consumer goods sectors such as clothing , bread or pencils to take a few examples. In other words, frames crises not as strongly the things that people actually direct consumer but hits the other hand, the things that are further away from the actual consumption , ie ” higher order goods” . Just as ABCT predicts , it is precisely the scenario that has played out in the current crisis, and especially the housing market this time around is especially hard hit. How can this be? The Austrian economist F. A. Hayek won the 1974 Nobel Prize in economics for a theory of economic cycles that have great explanation terms of power, particularly in light of the current global financial crisis , economists worldwide have significant difficulties to explain. Hayek’s theory builds on Ludwig von Mises previous work in the field and consider the very entity whose job it is to manage the economy without the recessions as prima causa for just these , namely the central bank. To return to Lionel Robbins ” cluster of errors” , it is also precisely the central bank and the manipulation of the interest he ends up turning its focus against. To look at the money supply gives also sense when you are looking for a common denominator of a broad economic problem and, as Robbins points out , is money after all to be found in all industries and corners of the economy. Robbins writes that in his book ” The Great Depression ” of 1934 : “Is it not probable att disturbances Affecting many lines of industry that once bliver found two seas monetary Causes ? ” [7 ] The natural rate of interest in the open market As mentioned earlier, it is in particular the central bank manipulation of interest rates that are extremely important, but let’s before moving on briefly look at how interest rates and savings function in a free market , as it is much to understand why a ” mismatch ” between the” natural ” rate and the actual rate may cause economic cycles. Yields and prices. This means that the money lent or borrowed capital is an asset and the interest rate you pay to borrow the capital , the price of this. When you deposit money in the bank in a savings account or buy a bond , you are the creditor and the interest of these represents therefore the compensation you receive to take the risk of making capital available . As with all other goods changed supply and demand and thus the price from time to time , and this is no different with money. Is there a growing number of borrowers , interest rates will rise , and interest rates will rise if there is a declining savings in the economy , so the money supply will decrease, and vice versa. This dynamic pricing of total savings is extremely important to have a healthy economy when data about time preferences contained in interest rates : Is there such . increased savings in the economy , increasing the supply of capital available , resulting in a lower interest rate . This presents the contractor an opportunity to invest in more capital-intensive projects with a longer time horizon , projects that would not necessarily be profitable in a higher interest rate ; Typically, projects that increase the productive capacity in the future, such as new factories , branches or other capital equipment / goods that can extend his future output capacity . From the contractor’s perspective, it is not only because it is now cheaper to make these investments , but also because the lower interest rate gives information about consumers’ relative willingness to consume less now and in the future. This is yet another incentive to coordinate these time-consuming and capital intensive investments to reflect consumers’ time preferences . Had consumers had different time preferences tended more here -and-now of consumption , there would be less savings in the economy and therefore less capital in supply and therefore a higher interest rate . This will increase the cost to the contractor and make the same time-consuming and capital intensive investments unprofitable and instead tell him that there is much willingness to consume now, so he should be producing at maximum output in order to sell as soon as possible . In other words, the interest rate thus facilitates the coordination of production through time. This ” natural” rate is the key feature of the market that assures that production and consumers’ time preferences are consistent . The artificially low interest rates Armed with this understanding of how interest rates in a free market coordinates production through time, we can rightly return to Robbins and Hayek’s critique of what happens when the central bank goes in and manipulate interest rates. As I have just shown , falling interest rates when there is an increasing level of savings in the economy , but when the market is no longer free , because the cost of money now can be manipulated by the central bank and on through the fractional reservebankssytem [ 8] , according to ABCT here , the crucial crisis spark constituted . Error coordination between the needs of consumers and producers supply begins here running in two different directions , as it is now in place is through the central bank’s operations , interest rates will be lowered , and not necessarily because consumers’ time preferences have shifted to more future consumption and thus lower interest rates that reflect this relationship. Low interest rates now sends a signal to investors and entrepreneurs that are not based on economic reality. The artificially low interest rates tell the contractor exactly as in frimarkedsscenariet that he can afford to expand capacity to reflect consumers’ future time preferences , but this artificially low interest rates reflect not really consumer future needs or national economy real mode, which initiates this error coordination. In other words, central tap cheap credit now created the illusion that there is now a wide range of projects that work profitable , although consumers no signals are sent to the market to postpone their current consumption and ” allocate ” resources to invest in higher stages of production . The low return on savings motivates the contrary the public to consume now rather than in the future, despite the fact that society even more than before need to save, which in turn makes the economy stretched in two opposite directions in which coordination of production and consumption through time are now being spoiled . As corporate projects progresses, it dawns on the contractor that the low interest rates and the economic reality no longer correspond , the economy’s actual savings ( the one that represents real value and not newly created “artificial ” liquidity or fiduciary media [9]) is not adequate in relation to the contractor’s expectations. This means , however, that the complementary factors of production are also scarcer than predicted , meaning labor, materials , spare parts and other resources therefore are more expensive than originally intended . Companies will now have to borrow more to cover these unforeseen costs, which quietly puts upward pressure on interest rates – the reality is about to set in – not all projects can be completed , because society is simply not rich enough to finance all these projects even though the artificially low interest rates have sent the signal. The interest rate should just act as a disciplining tool that sets a cap on the number of projects that can be started for just not to overstretch what society’s total savings to finance in the long run. When interest rates artificially lowered , more loans and initiated several projects can be started , but the central bank can not magically conjure up the additional resources through cheap credit , or so-called fiduciary media that society needs . The U.S. boom What the central bank’s low interest rates , in turn, creates a boom with the illusion of immediate growth and prosperity , just as we saw in the period from end 90s and up to 2007, when equities and property values ​​shot up. New construction is everywhere, companies expands and the public enjoys a high standard of living. The problem, however , that it is precisely the illusion , the economy is in an inflationary Sugar Rush [10] and the reality hits suddenly in the form of rising interest rates , exactly as seen in the period between 2004-2006 when interest rates rose from 1 % to 5.35 % and triggered the subprime crisis . Investment is found not to be sold or be left before completion , with resources partially or completely lost and society as a whole poorer. Looking at monetary expansion and falling interest rates , dating back to 1984, and especially during the period from about Dotcom crisis in 2000 and how it corresponds with the low interest rates in the “boom period ” fits the empirical data with ABCT ‘s interpretation of a monetary expansion with that the low interest rates and an increasing rate up to a collapse – both by Dotcom crisis and financial crisis . If we look at MZM [11 ] is the monetary base from 1995 to 2010 has been expanded by over 200% , while the rate of interest , both before Dotcom crisis in the beginning of the nineties and before the financial crisis in the beginning 00s , has been exceptionally low . Dotcom crisis is in many ways important to understand how to use interest rate cuts acquisitions , to increase ‘ aggregate demand’ , in fact, may have exactly the opposite effect than intentional , since it obstructs the market attempts again to ” clear ” and restore the crucial relationship between the needs of consumers and the use of the scarce resources that are in the community and instead just postpone and accumulate problems going forward. The macroeconomic clean lowering tool was extensively used by the IT bubble burst and unfortunately coincided with 9/11. This countercyclical response to 9/11 and the ongoing recession manifested itself in what has become known as “The Greenspan put” when interest rates hit a 45 year record – low base of only 1% , and lasted a record – long period from July 2003 to July 2004. , it is not unreasonable to call into question whether a record low interest rates may have led to a flood of newly created credit that simply must manifest a given place in the economy. This is also supported by the data: If we look back on the money supply graphs MZM and M2 , we also see a historic expansion of just over 50% in only a few years spent between the two recessions . [12] ABCT describe here how bad investments in a sector have been excited and in this case the data must be interpreted as meaning that the first rate cut in starting 90s manifested itself in a manic IT bubble in 2000 through increasing relative prices in the sector [13] proved not reflect economic reality . Instead of letting the market clear , tried now with “The Greenspan put” to pursue an inflationary expansionary monetary policy to increase the overall consumption in society, which had the opposite effect of what was intended. Consumer needs and resources of the economy was now further delayed and is thereby created just one more ‘ mismatch ‘ and simultaneously a vastly larger bubble in the economy , in this case just the property market. Chairman of The Federal Reseve Ben Bernanke has pursued the same expansionary monetary policy in order to avoid a total deflationary collapse in 2008 , and lowered interest rates to a bizarre low of only 0.15 % . ” Austrians ” , among the economists who actually were out and warns against the coming crisis long before it dawned on mainstream, warns specifically against this continuous process of inflation honors harmful consequences. As I pointed out earlier, there is a relationship that is worth paying extra attention to when you have to decide the extent of the current crisis : It’s not just a temporary decline in interest rates and a temporary expansion of the money supply, but a pattern that goes back to at the end of 1984, when again and again tried to cut interest rates and expand the money supply as soon as the market desperately tried to clear . The financial crisis differs from the IT bubble or the Asian crisis with LTCM [14] at this time to represent the accumulation of 25 years of expansionary monetary policy without practicable to cut interest rates further . Austrian economists have warned against this as ” The Keynesian Endgame ” – a point in time when market pressure to reorganize time preferences , savings and production is so urgent that it can no longer postpone the problem of cheap credit. Constantly introducing more cheap credit , printed out of thin air , not create more wealth in society, as it represents only a mirage of “false savings ” that do not represent real value. To encourage people to consume out of a debt crisis similar to pouring gasoline on a fire trying to extinguish [15]. It has never been and can continue to not consume rich, and by constantly not to accept the market’s attempt to heal itself muddles only society’s capital structure further , creating the seeds for either another new and worse asset bubble years of stagnation or worst case, the total destruction of people’s savings through hyperinflation. ABCT is not a cycle theory are particularly interested in the actual recession, but is on the other hand placed on it during the boom period that the damage is done in contrast to the Keynesianskemakropolitik that inward focus recession and try to treat the symptoms instead of going to the root of problem. ABCT advocate here instead that the market for anything in the world not to be disturbed in this healing process that attempts to restore its capital structure and reestablish the relationship between consumption and savings. Written by Thorbjørn Rønje [1] Ludwig von Mises ; “In the summer of 1929 , Mises was offered a high position at the Kreditanstalt Bank . but turned the position down ; “A great crash is coming , and I do not want my name in any way connected with it . ” – Mises , Margit von . 1984. My Years With Ludwig von Mises , 2nd ed . Cedar Falls , IA : Center for Futures Education. pp. 23-24. F. A. Hayek may also cited about 1929 ; “I was one of the only ones two predict what was going to happen . In early 1929 når I made this forecast, I was living in Europe som was just going through a period of depression. I said at der [ would be] no hope of a recovery in Europe until interest rates fell , and interest rates would not fall until the American boom Collapses som I said was Likely To Happen Reviews within the next few months . ” – Hayek , Friedrich A. 1975. interview . Gold and Silver Newsletter . Newport Beach, CA : Monex International (June) [2] These are all Austrian economists who predicted the financial crisis , Mark Thornton 2004 http://mises.org/daily/1533 – Stefan Karlsson 2004 http://mises.org/daily/1670 – Frank Shostak 2004 http : / / mises.org/daily/1882 – Peter Schiff 2006 http://www.moneyweek.com/news-and-charts/peter-schiff-free-marketeer-who-predicted-the-crisis-45136.aspx – Congressman Ron Paul 2003 http://libertymaven.com/2008/09/19/ron-paul-the-nostradamus-who-predicted-the-current-financial-crisis/1965/ [3] The expansion of the money supply is also the original definition of inflation, and not as many misunderstood believe the price increase. Jvnf : http://mises.org/daily/908 [4] Standard & Poor ‘s Home Price Values ​​, September 2008. [5] According to the government’s own figures, the unemployment rate was 6.7% here . Measured with the method the U.S. government itself used in 1970 , unemployment was here the whole 16.7% ( www.shadowstats.com ) [6] Robbins, Lionel : The Great Depression , The Ludwig von Mises Institute, 2007 , p.31 [7 ] Ibid , p 16 [8] Understanding the fractional reserve banking system’s ability to create inflation (in coordination with the central bank) is essential to understand how this seemingly harmless ratio between deposits and loans has enormous significance for the creation of economic conditions. This I must of space not read though more: http://www.lewrockwell.com/rothbard/frb.html or in book form here: http://mises.org/books/mysteryofbanking.pdf [9] Fiduciary media . Money – substitutes frit accepted the face value som bestå in claims two payment on demand of SPECIFIED sums of money in excess of the monetary reserves luck for sin redemption . Fiduciary money includes token money, bank or treasury notes and demand deposits (deposit currency or checkbook money ) som overstige the mængde af cash reserves immediately available for sin conversion into money proper . Fiduciary media are money – substitutes . ie newly created money that does not have some real underlying assets of its value. [10] Despite the government’s own figures showed low inflation, increased house prices , commodities, oil, gold and equities enormously in the period before the financial crisis . These figures are included as such in the CPI , but can still be a reflection of massive inflation during the period. [11 ] MZM er blevet one of the preferred åtgärder of money supply fordi it better represents money Readily available indenfor economy for spending and consumption . This measurement Derives its name from its mixture of all the liquid and zero maturity money found indenfor three ” M’s . ” Http://www.answers.com/topic/money-zero-maturity-mzm [12 ] This should be seen in the last two gray lines indicating Dotcom recession ending around 2001-2002 and the start of the financial crisis in 2007. [13] Macro economists focus on the general price level reveals not just sectoral relative price increases as one instance . so during the IT bubble ( IT engineers , programmers, Silicon Valley housing , IT – floor management etc.) Callahan and Garrison ” Dot Com Boom and Bust ” p 87 [14] Long Term Capital Manege Apartment crisis : Long-Term Capital Management ( LTCM) was a U.S. hedge fund trading strategies used som som fixed income arbitrage , statistical arbitrage , and pairs trading , combined with high leverage . It failed Spectacularly in the late 1990s , leading to a massive bailout by other major banks and investment houses , [1] som was supervised by the Federal Reserve . http://en.wikipedia.org/wiki/Long-Term_Capital_Management [15 ] The economist Gerald O’Driscoll , a former senior official at the Federal Reserve compares when even the Fed with “An arsonist watching a fire he set , expressing amazement that how som an event could have happened” Quoted in Richard Rahn , “The Bold : Solution or Problem ” Washingtong Post, November 26, 2008

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  • Profile photo of Jeffrey Tucker Jeffrey Tucker

    Theories of the Trade Cycle

    Theories of the Trade Cycle Author Alec Macfie weighs Hayek’s point against prevailing business-cycle theory, and presents what was surely the clearest explanation in English at the time. The book illustrates what a huge step in the right direction Hayek’s insights meant for prevailing wisdom — and what a gigantic setback Keynes’s own theories really were. Macfie shows that the reluctance to embrace Hayek’s views all came down to one central problem: the political impossibility of embracing bust-time liquidation and radical monetary reform as the only real solution to the business cycle. This book is only recently re-discovered. Why was it lost? How many more Austrian classics are extant? Kick off the discussion! Questions, comments, observations or elaborations? Either reply here or create a new discussion using the tag Library_Theories of the Trade Cycle

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  • Profile photo of Jeffrey Tucker Jeffrey Tucker

    Banking and the Business Cycle

    Banking and the Business Cycle This appeared in 1937 as a wonderful Austrian take on the great depression and it shows the incredible myth that no one had a clue why the depression occurred or what to do about it. This book tells all — right when it was needed most. And this was three years after Keynes’s book came out. This is a fantastic alternative but insufficiently appreciated by Austrians themselves. Kick off the discussion! Questions, comments, observations or elaborations? Either reply here or create a new discussion using the tag Library_Banking and the Business Cycle

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Was the financial crisis a result of the unfettered free market, or did government intervention play a role in creating the Great Recession? Economist Steve Horwitz discusses the economic crisis of 2008 and the Austrian theory of the business cycle. Join Horwitz Tuesday, August 19th at 8pm EDT!

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