Malinvestment and unertainty


For those wishing to delve a bit more deeply into how the ever-popular Keynesians are doing their best to stretch the current "mortgage derivative bank bubble" correction into another Great Depression -- and how economists of the Austrian school, from Friedrich Hayek to Henry Hazlitt to Murray Rothbard, had their number and warned us about all this decades ago -- I give you Robert Higgs, senior fellow in political economy at the Independent Institute and author of the books "Neither Liberty Nor Safety,"  "Copmpetition and Coercion," and "Crisis and Leviathan," among others:

"The theory pioneered by Ludwig von Mises and Hayek in the first half of the twentieth century, a theory that fell into near-oblivion after the Keynesian Revolution in macroeconomics, is a theory of malinvestment, which is to say, a theory of how an artificially reduced rate of interest leads business firms to invest in the wrong kinds of capital; in particular, in the longest-lived capital goods, such as residential and industrial buildings, as opposed to inventories and equipment with a relatively short life. Thus, in the Austrian view, Fed-induced low rates of interest, like those between 2002 and 2005, lead firms to overvalue longer-term capital projects and to shift their investment spending in that direction, producing, for example, booms in building construction. ...

"Vulgar Keynesians are nothing, if not policy activists. Like Franklin D. Roosevelt, they believe that the government should 'try something,' and if it doesn't work, try something else. Better still is that the government try a bunch of things at once, and if they don't turn the trick, then pour more money into them and try something else, to boot. The eras they esteem as the most glorious ones in U.S. politico-economic history are Roosevelt's first term as president and Lyndon B. Johnson's first few years in the presidency. These periods witnessed an outpouring of new government measures to spend, tax, regulate, subsidize, and generally create mischief on an extraordinary scale. ...

"The vulgar Keynesian does not understand that policy activism itself works against economic prosperity by creating what I call 'regime uncertainty,' a pervasive uncertainty about the very nature of the impending economic order, especially about how the government will treat private property rights in the future. This kind of uncertainty especially discourages investors from putting money into long-term projects. Such investment, which almost disappeared after 1929, did not recover until after World War II. ..."

Go, therefore, take some aspirin, and read the whole sobering thing.