Booms, Busts, and Money

George Selgin writes,

it seems to me that there is a good reasons for not buying into Friedman’s view that there is no such thing as a business cycle, or Sumner’s equivalent claim that there is no such thing as a monetary-policy-induced boom. The reason is that there is too much anecdotal evidence suggesting that doing so would be imprudent. The terms “business cycle” and “boom,” together with “bubble” and “mania,” came into widespread use because they were, and still are, convenient if inaccurate names for actual economic phenomena. The expression “business cycle,” in particular, owes its popularity to the impression many persons have formed that booms and busts are frequently connected to one another, with the former proceeding the latter; and it was that impression that inspired Mises and Hayek do develop their “cycle” or boom-bust theory rather than a mere theory of busts, and that has inspired Minsky, Kindleberger, and many others to describe and to theorize about recurring episodes of “Mania, Panic, and Crash.” Nor is the connection intuitively hard to grasp: the most severe downturns do indeed, as monetarists rightly emphasis, involve severe monetary shortages. But such severe shortages are themselves connected to financial crashes, which connect, or at least appear to connect, to prior booms, if not to “manias.” That the nature of the connections in question, and the role monetary policy plays in them, remains poorly understood is undoubtedly true. But our ignorance of these details hardly justifies proceeding as if booms never happened, or as if monetary policymakers should never take steps to avoid fueling them.

Read the whole thing. The conventional wisdom, as of 2007, was that no matter what happens in financial markets, the Fed can keep employment high if it avoids disappointing people’s inflation expectations. That conventional wisdom disappeared during the crisis of 2008. At that time, Chairman Bernanke decided that ordinary monetary policy was not going to work. Instead, bailouts were needed in order to prevent a catastrophic recession. In the event, we had a bad recession. Now, the conventional wisdom is that he was right and that he made the recession less catastrophic. My alternative hypothesis is that we got more or less the same recession we would have had without bailouts (and without the stimulus, for that matter). It is impossible to go back and run the relevant experiment to determine who is right. I am willing to admit I may be wrong, but I think that those who espouse the conventional wisdom ought to be equally modest.

Scott Sumner became a notorious radical by sticking with the pre-crisis conventional wisdom rather than adopting the post-crisis conventional wisdom. Meanwhile, as Selgin points out, the Austrian alternative that there is such a thing as an unsustainable boom has been picked up by everyone from erstwhile descendants of Milton Friedman to President Obama (in the latter case, it fits in with the narrative that everything bad that takes place during his Administration is the fault of George Bush and/or Congressional Republicans).

My instincts are:

1. Downplay the role of the financial crisis, as opposed to ongoing structural adjustment.

2. Having said that, rapid expansion and contraction of the banking sector is bound to require a lot of short-term structural adjustment elsewhere, particularly in the contraction phase.

3. I am finding myself more and more reverting to what I call the MIT view (before Dornbusch and Fischer) that asset shuffling by the Fed (including all the conventional tools of monetary policy as well as the unconventional ones) does not have much impact.

5 thoughts on “Booms, Busts, and Money

  1. 3) Yes but asset shuffling is about all that anyone can expect to have, until local economies get serious about reigning in their own tendencies towards exclusionary forms of inflation (NIMBY practices, zoning and regulation) to raise money for their tax base. That is your real cause of unemployment.

  2. Which papers/books would you consider keystones in the “MIT view”? I’d like to look into this further.

  3. We did have a similar situation in the Great Depression and three and a half years of extended and vast collapse suggests these actions were not without effect. It is not difficult to see why either, as each collapsing institution creates losses that cascade through the system. It is easy to say purge the rottenness out of the system and we will recover faster, but the evidence is rottenness just spoils whatever good is left, creating more rottenness in its path. That said, there is a limit to what we are willing to do, even if we can. Call it a lack of imagination as well as will, or perhaps schadenfreude in the downfall of the others to flatter our sense of superiority. There was no way we could have prevented the collapse of asset values and debt though, as they were not valued on incomes but on speculative gains, and while we can boost monetary policy and lower the cost of debt, boosting incomes is much more difficult. Structurally, I would put it in the source and quantity of income and profit. Monetary policy may not have that much effect to counter all of this, but that doesn’t mean it is impotent and it is probably very important in ending the vicious cycle. Bad policy can be very, very bad indeed.

  4. To believe “We beat the War Party” as Justin Raimondo of Antiwar says, is a misconception. There is no human action as Libertarians believe, there is only Jesus Christ moving to accomplishing the Economy of God, as described by the Apostle Paul in Ephesians 1:10, specifically to accomplish God’s purposes as foretold in Bible Prophecy, as in today’s case, a soon coming war in Syria, where Damascus will be absolutely and utterly destroyed, according to Isaiah 17:1; and which will serve to draw Russian out military forces to commence World War III, specifically to put hooks in Russia’s jaws, and lead its military forces into the middle east, as presented in Ezekiel 38:1-4, which will be a debacle, that coupled with the failure of credit and the collapse of banking, will terminate the Business Cycle, as well as US Dollar Global Hegemony, and introduce regional governance and totalitarian collectivism, as seen in Revelation 13:1-4.

    In 2009, Fed Chairman Bernanke introduced QE1, traded out money good Treasuries, TLT, for the most toxic debt of all types held by the banks, which found their way back to the Fed as excess reserves. This interventionist policy secured investment trust, and reinflated credit worldwide, stimulated global growth and trade, and provided spectacular investment rewards, in such things as Small Cap Value Stocks, RZV, and Global Producers, FXR, through the Leverage Speculative Investment Community, consisting of Asset Managers, such as BLK, Stock Brokers, such as AMTD, Investment Bankers, such as JPM, Banks such as LYG, and Creditors, such as IX.

    There is no sustainable economic boom as Jesus Christ operating at the helm of the Economy of God, Ephesians 1:10, enabled the bond vigilantes to rapidly call the Interest Rate on the US Ten Year Note, ^TNX, higher to 2.01% on May 21, 2013, which constituted a “termination event” in Emerging Market Investment, EEM, in Utility Stock Investment, XLU, and in Real Estate Investment, IYR, such as REM, REZ, ROOF, and FNIO. And the further fast rise of the interest rate on August 13 2013, to 2.71%, constituted an “apocalyptic event” which terminated fiat money, in particular Major World Currencies, DBV, and Emerging Market Currencies, CEW, both of which bounced higher in value, in response to the averting of war in Syria.

    The crack up boom part of the Business Cycle is now complete as World Stocks, VT, relative to World Treasury Debt, BWX, that is VT:BWX, and Eurozone Stocks, EZU, relative to EU Debt, EU, EZU:EU, have peaked at their all time highs, on margin credit.

    The 35 ETFs and Stocks seen in this Finviz Screener … http://tinyurl.com/pd3pqsw … are excellent short selling opportunities; these being XIV, FDN, CARZ, PBS, IGV, IBB, RZV, PSCI, FPX, IAI, XTN, SMH, XRT, PJP, PSP, TAN, RXI, FLM, EIRL, WOOD, EUFN, RWW, SPHB, FXR, IGN, BJK, PBJ, EFNL, YAO, NKY, SEA, IX, PRAA, GNW, LYG.

    Jesus Christ acting in Dispensation, presented in Ephesians 1:10, that is oversight of all things economic and political for the fulfillment of every age, era, epoch and time period, has completed the paradigm of liberalism and is that of authoritarianism. Liberal policies of investment choice and schemes of credit are being replace by authoritarian policies of diktat and schemes of debt servitude, where banks will be integrated with the government, and be known as the government banks, or gov banks for short, and nannycrats will rule in statist public partnerships over the factors of production for regional security, stability, and sustainability, establishing austerity over all of mankind.

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