The crash from an Austrian perspective

Steven Horwitz gave a talk at the Adam Smith Institute in London on "An Austrian perspective on the great recession of 2008-09". The following 6 points come from notes taken by a reporter from the Spectator and which appeared in their "Coffeehouse" column.

1. The Austrian Business Cycle Theory is necessary but not sufficient to explain the recession. Think of it as a car pile-up. Imagine we see an enormous rise in the number of traffic accidents in a major city. Cars keep colliding at intersections as drivers all seem to make the same sorts of mistakes at once. Is the most likely explanation that drivers have irrationally stopped paying attention to the road, or would we suspect that something is wrong with the traffic lights? Even with completely rational drivers, malfunctioning traffic signals will lead to lots of accidents. Keeping interest rates artificially low is like getting all the lights stuck on green.

2. The crash has nothing to do with greed. Or, rather, greed is no more to blame for these bad mortgages than gravity is to blame for plane crashes. Gravity is always present, just like greed.

3. Blame artificially low interest rates. They may create a feel-good factor, as people fill their homes with cheap stuff. But they wrongly incentivise borrowing, causing a boom followed by a bust.

4. Deregulation was not the culprit. From 1980-2009 in the US, there were 4 new regulatory policies for every 1 deregulatory policy.

5. Lessons for recovery. Bailouts and stimuli are not the answer. We need to let the healing take place and encourage savings that create capital and wealth. We do not need a “recovery plan” – recession is the recovery.

6. So what can we do? In the short-run: encourage hiring across the board (e.g. in the US, suspend payroll tax). We can suspend capital gains tax to encourage investment. We can sell off government stakes in GM and the banks, and stop bashing profit-seeking behaviour. And in the long-run: limit the powers of the central bank. Consider stronger thresholds for major fiscal policy decisions (e.g. supermajorities or balanced-budget requirements). And, finally, end subsidies.