Sydney Kendall Says

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I keep running across the idea that consumer spending is the thing that “runs” the economy. Boost consumer spending and you save the day.

That isn’t the view of the economic school that I’ve been convinced of for many years. The Austrian School of economics is the one that makes sense to me.  Here are a couple of articles explaining why consumer spending is not “the” savior, and how saving in the aftermath of an exploded boom is a good thing.

Consumers Don’t Cause Recessions by Robert P. Murphy

The Importance of Capital Theory by Robert P. Murphy

Also troubling in regard to our present financial damages are statements to the effect: “It’s de-regulation that lead to the finanacial crisis” and “The crisis has proved laissez-faire economics to be a failure”, as if the market has actually been de-regulated or that we’ve been living in a laissez-faire economy.

I highly recommend the following to correct that particular misunderstanding:

The Myth that Laissez Faire Is Responsible for Our Financial Crisis by George Reisman

And how about this one on how the present financial crisis was the result of government intervention in the economy:

The Government Did It by Yaron Brooke

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4 Comments

  1. The government certainly deserves it’s share of the blame. This doesn’t absolve the bankers and rating agencies though, does it?

    I like the Austrian explanation of this crisis. It makes a lot of sense. However, what I hear sometimes on pro Austrian websites about how this crisis is solely the fault of the Fed or solely the Fed + government or completely because of regulation gives me paused to wonder.

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  2. Hello Steven and Prodos.

    Welcome!

    Steven, you say:

    The government certainly deserves it’s share of the blame. This doesn’t absolve the bankers and rating agencies though, does it?

    I like the Austrian explanation of this crisis. It makes a lot of sense. However, what I hear sometimes on pro Austrian websites about how this crisis is solely the fault of the Fed or solely the Fed + government or completely because of regulation gives me paused to wonder.

    I’m not sure that the Austrians have been saying that none of the people in the private sector have done anything wrong, but that the government policies encouraged, threatened, and bribed (with implied guarantees) banks and other lenders to act in foolish ways that they would not likely have risked had it not been for those government policies. Had there not been threats as well as guarantees, would lenders have taken such stupid risks?

    I have serious doubts about that. The rules were designed in a way that gave the worst players the go-ahead for their recklessness.

    The issue at stake right now is the view that is being pushed by those who want more government control of the economy, and see this crisis as an opportunity to convince the average Joe and Mary that the free market is faulty and needs more regulation, when in fact it was regulation that made it easier for legally fearful or sloppy, or dishonest, or manic financiers to transgress sound economic sense and do what they wouldn’t do if they didn’t have governmental sticks and carrots threatening and tempting them.

    Austrians don’t claim that a fully free market will never have shysters or bad businessmen, but that by the nature of the free market the foolish and the crooked won’t get as far and the corrections to the market won’t take as long as when politicians muck around with our economics.

    The proper role of government in regard to the economy is to outlaw coercion and fraud and enforce contracts, not to engage in coercion and to encourage fraud in the market.

    But the financial crisis we’re in today is more than just the lending fiasco. It’s also what government has been doing with the money supply, as the articles above explain.

    Prodos, thanks for linking to the Sowell article. It’s a good one.

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    • Good evening Sydney and Steven,

      In the Thomas Sowell article he provides a “before and after” contrast.

      Before
      such state instruments as the Community Reinvestment Act of 1977 ….

      … directed [Prodos: i.e. coerced] federal regulatory agencies to “encourage” [yeah, right] banks and other lending institutions “to help [i.e. sacrifice themselves to] meet the credit needs [i.e. from those of ability to those of need … where have I heard that one before?] of the local communities in which they are chartered consistent with the safe and sound operation of such institutions.

      Don’t you love that? “… consistent with the safe and sound blah, blah, blah …”

      Lending institutions were forced to act in a manner inconsistent with their rationality and self-interest but to do so in a manner that was consistent with it.

      Anyway, BEFORE such nonsense took hold …

      “Lending money to American homebuyers had been one of the least risky and most profitable businesses a bank could engage in for nearly a century.”

      Now in the grip of such altruist, irrational #@%*&!, what happened?

      Here is the AFTER

      Under growing pressures from both the Clinton administration and later the George W. Bush administration, banks began to lower their lending standards

      The agency entrusted with protecting life, liberty, contract, is now an agent of extortion and plunder.

      Thomas Sowell relates all this in his typical understated, calm fashion.

      But any self-respecting individual – whether American, Australian, British, whatever – would find it difficult to learn all this and not be outraged.

      Time to do the Santelli!

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