This post at Zerohedge poses the counter-intuitive hypothesis that the Federal Reserve’s strategy for reducing the frequency and depth of recessions hasn’t functioned exactly as advertised:
Not too long ago, in a land not so far away, the business cycle was declared to be defeated. Policymakers at the Federal Reserve were credited with slaying the pesky beast that featured recessions as part of its nature. Such was the faith in the permanence of business cycle’s demise that the era was given its own label, The Great Moderation, a perfect world in which inflation ran not too hot or too cold and profit growth was accepted as the steady state.
As is so often the case, reality rudely disturbed nirvana’s prospects. The Great Moderation devolved into the Great Recession precipitated by one of the most devastating financial crises in U.S. history. The veneer of calm advertised over the prior years was stripped away. In its stead, economists had to concede that an era of benign monetary policy had encouraged malinvestment, the scourge that Austrian Ludwig von Mises warned of in the early 20th century. An overabundance of debt, if left unchecked, inevitably leads to the misallocation of resources. In the case of the first years of the 2000s, the target was, of course, the housing market.
The costs of the Fed’s strategy are obvious but, sadly, largely unacknowledged. For one thing they have practically made my case in favor of the Social Security program for me: it is now impossible for most people to save for their own retirements without reducing their level of consumption to one that would in turn reduce economic activity to a dire extent and without assuming much higher levels of risk. That in turn implies that there will be many, many more losers than would otherwise be the case.
How does “misallocation of resources” result in recession? Mises was never able to answer this question?
I would think it would lead to slower growth. Not that there’s a straight line connection between recession and slower growth but it’s not completely irrelevant either.
Ok, let’s assume ZH has mispoken and means to write that misallocation of resources produces lower growth.
What does it mean to “mis” -allocate? The implication is that resources should have been devoted elsewhere, but where? How is it determined this is a good assignment and that it not? How does debt uniquely misallocate? What sort of debt, given there are many? To my knowledge von Moses never argued aggregate debt impeded growth, so it would seem strange the author invokes the man on such a point.
I guess my point is that there are too many opinions on this stuff which don’t really answer our questions or give us a useful starting point for asking them.
It’s basically Econ 101 (or at most 301) stuff. Productive efficiency. How that’s determined is presumably through the workings of a free market.
For me the more relevant question involves the policy of the second best. We’re not going to have free markets because we don’t like the secondary effects. What’s the second best solution?
I thought the reference to Von Mises was a dogwhistle. I haven’t found many people who invoked him who’d actually read his works.
Ben, it seems to me you are attempting to beg a straw man through a series of rhetorical questions. Just ask yourself what is going on in the capital markets right now. Do you find equity valuations and debt rates sensible? It would defy comprehension to assert that, given various economic metrics and prospects, huge equity valuations reflect real expectations for fundamental earnings growth. It’s been a multiple arbitrage world.
Does borrowing at almost no cost and investing in your your enterprise on a stock exchange seem a misallocation?
The post is mostly a repost. Below the embedded video is a link: Something new at The Liscio Report
They are pro-gold standard and anti-Fed. I think they are anti-fractional reserve lending. They are mostly Austrians. If you think I am bad, they are several notches worse. I have not seen anything about Glass-Steagall, but they are against the reason G-S was enacted. Other things they do not agree with are GDP, aggregate demand, and most government statistics.
The first paragraph quoted is not their belief. They are using the tenets of the theory to impeach the theory. The second paragraph is a snippet of a larger argument, and this post is only one part of it. The existing economic conditions are a consequence of money borrowed into existence.
The debt being created is leveraged money, and it is being used to create assets that would not necessarily be created if the only money available were unleveraged (hard) money.
In simple terms, the proof that this leveraged money was misallocated is that the collateral used as leverage is no longer worth what it once was, and the credit instruments are underwater. Until the asset prices increase to support the credit instruments or the debt is paid off, written off, or written down, there will be a general sluggishness.
If there were a class of assets whose prices were inflating fast and high enough, you might be able to overcome the results of the bad debt. This has been done in the past by creating new bubbles, but it is not working this time.
They are stricter than I am, but we are in the same ballpark.