Hey forum people,
some dude's criticism of austrian economics, I am not learned on the technicalities of austriansim so its hard for me to discern right and wrong. eat this shit alive.
http://www.reddit.com/r/Economics/comments/i2y8f/debunking_austrian_economics/
Rothbard meant that if the new money is loaned to consumers to consume, then of course more money won't be spent by businesses to build factories and long range heavy industry projects. They didn't get the money, the consumer did.
However, the housing bubble that started our millenium is a hybrid. The consumers got the money lent to them primarily to buy houses, not to spend on pizzas. So the money will be channeled not to heavy industry, and not to consumer goods of all kinds, but to houses.
Other than that, if we replace heavy industry with houses, the classical features of the ABCT apply. Low interest rates, malinvestments in housing, the whole shebang.
EDIT: Of course, this particular train wreck had unique features that would have caused Mises and even Keynes to turn over in their graves. Mises and Rothbard were writing under normal circs, where the bankers won't lend the money to someone they are pretty sure won't pay back. But a combination of ingredients [=govt meddling in various ways] all directed to get the common man a house to live in no matter what, created a situation where the banks were happily lending money to people who they knew were never able to repay it in the first place. They then sold those loans to suckers all over the world, after the rating agencies assured the suckers that those loans were solid gold. At some point, many of the banks found themselves buying back some of those same loans without realizing it, because the whole thing was such a mess of paperwork and confusion.
But fear not, there was plenty of money involved, enough for everyone to lose.
I think it's pretty obvious that such a scheme is a formula for disaster in and of itself, and sure enough, the disaster happened.
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It's easy to refute an argument if you first misrepresent it. William Keizer
Interesting. This was kinda my hunch. Since the demand for housing was created under "artificial" circumstances, resources were directed into building homes that under free market conditions would not have been built, since not nearly as many individuals would have been able to get loans to buy them. But since the government stimulated this housing spree through loose money the demand was there which translated into contracters building homes, using up resources, and all the while malinvesting, because people were dupped into thinking they could afford a home. Does this sound remotely right :)
"It is easy to be conspicuously 'compassionate' if others are being forced to pay the cost." - Murray N. Rothbard.
@Smiling Dave
you say in your post that the money was channelled to houses not to heavy industry(capital goods?) in this case would there be an over extention of consumption(buying houses) beyond the available capital? essentially there was not enough capital created to allow for such consumption?
Anarcho,
We have millions of houses just lying there uninhabited with no one to buy them, and I imagine quite a few unfinished ones, don't know exact statistics. So yes, plenty of wasted resources malinvested in houses there was no true demand [=ability to pay] for.
Bill,
Was more built than the available capital? Sure, all those unfinished houses. But I think the way to look at is if the demand is really there, meaning enough people want and can afford something, someone will cough up the capital for it. In an ABCT, as well as in this bubble, there is not enough capital because there was no true demand for what the money was being used for. The entrepeneur thought he wanted factories high up on the scale of production because people want him to build them so he can sell them frisbees or whatever. Same with houses. But in reality there was no demand, so the capital is not forthcoming.
With houses, the capital did come forth in many cases, because the builder thought he would get paid for the house, i.e there was true demand, but there wasn't. This would correspond to the entrepeneur finishing his factory and churning out tractors or whatever that nobody wants. Apparently this is not common in a classical business cycle, because the money is malinvested in things that take a long time to finish, and the money runs out first. But in the 2000's the story was slightly different, as I mentioned in the first post.