Apropos Austrian Aphorisms

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The prescience of Hazlitt

Shortly after the erection of Fannie Mae, and nearly 30 years before that of Freddie Mac and the legislation of the Community Reinvestment Act, Henry Hazlitt was there. The voice of the Austrian school could see it with his refined eye, as only he could. 'It,' of course, is the unseen consequences of government action.

From the Fiftieth Anniversary edition of Economics in One Lesson, p. 33-4:

"The case against government-guaranteed loans and mortgages to private businesses and persons is almost as strong as, though less obvious than, the case against direct government loans and mortgages. The advocates of government-guaranteed mortgages also forget that what is being lent is ultimately real capital, which is limited in supply, and that they are helping identified B at the expense of some unidentified A. Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to "buy" houses that they cannot really afford. They tend eventually to bring about an oversupply of houses as compared with other things. They temporarily overstimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief, in the long run they do not increase overall national production but encourage malinvestment."

Published Sat, Feb 7 2009 5:31 PM by thedo


# re: The prescience of Hazlitt@ Thursday, February 12, 2009 4:49 AM

I find Henry Hazlitt's views to be particularly perceptive. I suppose his journalistic flair allowed him to see things that most economists could not.

Interestingly, though, Hazlitt argued the gold standard could generate the same boom bust cycle (in housing) as fiat currency.*

If you compare what is happening in America today *due to government comission rather than omission and what happened in Australia in 1890 *under free banking* - the results were the same: massive unemployment and deflation.

According to Hazlitt:

"...Thus according to Hazlitt, banks continued to lend funds above the amount of gold held in their vaults. It is here that the “boom” begins. Hazlitt outlines a hypothetical scenario in which banks lower their reserve ratio to 50 percent. With twice the lendable funds, banks are “now suddenly free to extend more credit. They can, in fact, extend twice as much credit as before. Previously, assuming they were lent up, they had to wait until one loan was paid off before they could extend another loan of similar size. Now they can keep extending more loans until the total is twice as great. The new credit plus competition causes them to lower their interest rates. The lower interest rates tempt more firms to borrow, because the lower costs of borrowing make more projects seem profitable than seemed profitable before.

Hazlitt thus found in such credit expansion a cause of the business cycle, which he thought could occur even with “free banking,” because banks would be pressured by competition constantly to lower their reserve ratios. While inflation under free banking would be substantially less than under government-managed credit expansion, it would persist nonetheless. Because of his profound dislike of inflation, regardless of the source, Hazlitt favored a “pure” gold standard, or a 100 percent reserve requirement. To secure this, Hazlitt advocated strict government regulation of required reserves. Any expansion of credit above the amount of gold held in reserve was fraudulent, and as such, should be prosecuted by government authorities, he wrote in The Inflation Crisis, and How to Resolve It..."


This is exactly what happened in 1890  - competition induced banks to lower there reserves and interest rates, igniting an artifical boom. So, my point is the free market - without a regulated market WHICH ENSURES A 100% GOLD STANDARD - can share the same limitations (ie a depression) as a government commissioned bank which gives poor people mortgages it could not afford even in the best of times :-)

* Mind you - credit is actually created before fiat currency is printed excessively - look into the endogenous theory of the money supply, which I one point I think Austrians are lacking and Keynesians have the upper hand. Remember credit can act as reserve desposits :-)