Austrian School Revolutionaries Must Stir Popular Anger!

The starting point of the blueprint is the growing awareness that monetary policies determined by inflation-targeting regimes were responsible for breeding the vast monetary disequilibrium, which was the essential condition for the global credit bubble and bust of the last decade. This ‘growing awareness’, however, is far from being the dominant or even majority view (however that is determined) among monetary economists. The present and previous head of the Federal Reserve (Ben Bernanke and Alan Greenspan respectively) strenuously deny that their policies were responsible for the credit bubble and bust. They would blame all on the massive Asian saving surpluses, claiming that these drove interest rates so low in the US (and Europe) as to set off a credit and asset bubble. . . .

Outside the central banks and in the academic world the main redoubt for attack on the central banks has been the so-called Austrian school (with writings collected, for example, on the von Mises website). The underlying theme is that considerable fluctuations of the price level, sometimes downwards, must occur over short- or medium-term periods of time if overall monetary stability in its widest sense – including asset and credit markets remaining in a temperate zone – is to be achieved as best as possible. Modern writers close to this school refine the notions of ‘asset and credit market inflation’ or ‘mal-investment’ found in the original texts (whether von Mises or Hayek, for example). There the mal-investment which resulted from monetary disequilibrium (characterized by a monetary authority driving rates far below neutral for an extended period) was wholly in the form of ‘ over-investment’ (excess production of capital goods relative to consumer goods). Production processes would become more capital intensive (or ‘time-intensive’) and consumer goods production would be curtailed relative to what would occur under conditions of monetary equilibrium. All of these distortions have to be reversed in the ensuing economic downturn.

The more relevant, and quantitatively much more important, concept of mal-investment, of which today’s ‘Austrians’ write, starts with a tale of temperature rise (irrational exuberance) in various credit and related asset markets stirred by monetary disequilibrium. This (temperature rise) stimulates an excess build-up of capital stock in certain sectors of the economy, which subsequently becomes obsolescent in economic terms when the bubble bursts (or temperature falls), with the result that vast stocks of physical and human capital waste away. The process of renaissance from these devastating experiences requires much new capital (savings), risk-appetite, entrepreneurship, technological progress (bringing new investment opportunity), and overall economic flexibility (including of prices and wages).

--Brendan Brown, The Global Curse of the Federal Reserve: Manifesto for a Second Monetarist Revolution (Houndmills, UK: Palgrave Macmillan, 2011), 79-81.