TITLE:
Neo-Austrian Views of the Global Financial Crisis and Its Pre-Corona Aftermath
AUTHORS:
Karl Farmer, Laurie Conway
KEYWORDS:
Financial Crisis, Neo-Austrian Economics, Austrian Business Cycle Theory, Unconventional Monetary Policy, Deflation
JOURNAL NAME:
Modern Economy,
Vol.12 No.4,
April
14,
2021
ABSTRACT: In the aftermath of the Global Financial Crisis
(GFC) 2007/2008 the sales of Hayek’s (1944) Road to Serfdom quadrupled, a clear indication of renewed public
interest in the views of (neo-) Austrian economists on macro-economic crises,
especially financial crises. It is also true that several economists associated
with the Austrian school, or those using neo-Austrian insights, correctly
predicted the U.S. housing bubble and the subsequent GFC, apparently, a clear
vindication of (neo-) Austrian cycle theory (Hunter,
2018). More surprising is that even relatively fierce
opponents of neo-Austrian macro-theory have meanwhile begun to accept some
Austrian insights. We thus ought to ask, what are the basic tenets of the
Austrian Business Cycle Theory (ABCT) and how did it enable some economists to
correctly predict the U.S. subprime crisis and its aftermath? In contrast, it
is also true that mainstream macro-economists, although struggling heavily to
come up with a suitable theoretical explanation of the GFC, neither accept the
neo-Austrian explanation of crises, nor its policy implications. Therefore, we
also need to ask why mainstream economists dismiss ABCT. Is it the alleged
neo-Austrian bias towards the supremacy of an unfettered market economy which
is rejected by the mainstream, or is it rather the lack of correspondence
between ABCT and the stylized facts of business cycles, such as the positive
correlation between consumption and investment? We also need to ascertain to
what extent the basic Mises-Hayek cycle theory can be applied to an explanation
of the U.S. subprime crisis and the GFC? For example, the neo-Austrian
economist Salerno (2012: p. 41) has
stated that the unprecedented monetary inventions by the U.S. Federal Reserve
(Fed) and the enormous government deficits run by U.S. administrations since
the Great Recession (GR) must at some point lead to a 1970s-style period of
stagflation. Why has this failed to materialize? We have currently experienced
the longest boom in the U.S. economy since the GR, a boom which has been
engineered by anti-Austrian ultra-loose monetary policy. How do neo-Austrian
authors manage to cope with such a fact? Such are the research questions dealt
with in the following paper. Following an introduction to the main topic, the
basic elements of ABCT are presented. Then, neo-Austrian extensions of basic
ABCT are applied to an explanation of the U.S. housing bubble and the
subsequent GFC. This is followed by discussion of radical neo-Austrian
critiques of the unconventional monetary policies used to reflate the U.S.
economy after the GR. The main question here is why such policies can continue
without producing an economic downturn or bust. The paper concludes with a
summary of neo-Austrian views on the GFC and its pre-Corona aftermath.