With the latest failure of yet another massive investment banking firm, the holdouts and Pollyanna's are beginning to slowly peek over their defensively-raised fists and start to admit there is something stirring that may indeed be rather consequential.
Of course, to anyone that has had the good fortune of being educated under the Austrian School of Economics, which specializes in business cycle analysis, this all has been no surprise at all. Indeed, we--I place myself in the camp, though I am no PhD in economics by any stretch--have been talking about the current collapse for about a decade. Just visit the center of the debate at the Ludwig von Mises Institute and you will quickly find that the current depression has been accurately analyzed for years.
A friend who has long scratched his head at my negative view of America’s macroeconomic future yesterday joked with me that the dire predictions of the Austrians were like a broken clock in that even a broken clock is right twice a day. He was teasing, but I think his humor illustrated something that the Austrian School of Business Cycle theory has run up against since its inception--namely, it is not the state-supported, dominate economic school of thought, and thus is ignored by the button-pushers and knob-twisters in government and the media.
If you had the fortune--or misfortune--to take economics in college, you'd quickly find that the class was comprised of immensely dry mathematical formulas and esoteric theories that seem more like a physics lesson than a study of human action. This is part of the problem.
Richard Nixon was largely right when he stated famously in 1971 that “We are all Keynesians now.” While some of the more outlandish precepts of John Maynard Keynes’s theories have been crushed by insurmountable evidence, the bulwark of his destructive influence has been adopted and amalgamated with the rash expedience of politically motivated actors in Congress, the White house, and the Fed.
Today war is seen as a net gain for economic growth, government spending in general is seen as a positive aspect of macroeconomic policy, hard money is disparaged, central management of financial markets by the government is seen as responsible, savings is systemically discouraged through tax policy and inflation, economic liberty is cautioned as dangerous and the root cause of financial instability instead of the government interventions which triggered them in the first place. And so on.
All these twisted concepts run contrary to the any possibility of future economic health. Indeed, without a marked apostasy from such thinking, the very antecedents for recovery are impossible.
So is there any move toward right-thinking policies that will aid in a recovery and hasten the malinvestments that were made systemically by bad government policy?
No.
While Lehman was not bailed out, one should not read too deeply into it. Today the Fed dumped $70 billion into the financial system in an emergency move to increase the availability of credit to other teetering financial firms that need capital—Like insurance giant AIG. It will probably lower the Fed Funds rate to as well in hopes that pushing on a string will somehow magically work.
This move will do nothing. The dye has long been cast. All the moves by the Fed now are merely like an ill-equipped medic attempting to field dress mortally wounded foot soldiers after a bomb went off. The problems--or wounds--are due to structural problems with our economy which were caused by prior interventions. The prescriptions given by government now is more intervention. This will merely further accelerate a complete collapse. The strong and cash-flush will survive, the old, frail, and debt-ridden firms will perish. There is no preventing the nature of things.
The party is indeed over in other words. If this sounds dire, it is. This is what happens when problems are ignored, the truth is squelched by power. The geniuses were not 'asleep at the wheel' as the two presidential candidates claim, they were just doing what they do under a system of corporativism.
The good news is that a correction is inevitable. While painful, the 'creative destruction' that will ensue will build the foundation for a sound future--at least in theory.
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