Wednesday, December 14, 2011

Austrians Predicted the Housing Bubble? – But so did Post Keynesians and Marxists

I see certain Austrians citing this LewRockwell.com article by Walter Block listing Austrians who supposedly identified or predicted the 2000s housing bubble:
Walter Block, “Austrian Thymologists Who Predicted the Housing Bubble,” LewRockwell.com, December 22, 2010.
Now the first point that should be made is that the heterodox Keynesian economist Dean Baker (who seems to be associated with Post Keynesianism) clearly identified a housing bubble in August 2002 in a Center for Economic and Policy Research paper:
Dean Baker, “The Run-Up in Home Prices: Is it Real or Is it Another Bubble?,” Center for Economic and Policy Research, Briefing Paper, August 2002.
Since the paper was published in August 2002, and Baker was no doubt coming to the view that a housing bubble was in progress months before by looking at the housing data, it is obvious that some economic observers were coming to this view as early as the first half of 2002. That is to say: a housing bubble was being identified at around this time, and the further asset price inflation in housing predicted by some commentators. In this paper, Baker also predicted a serious economic crisis coming from the collapse of the bubble:
“The collapse of the housing bubble, implying a drop of between 11 and 22 percent in the average of housing prices, will destroy between $1.3 trillion and $2.6 trillion in housing wealth. …. In the late eighties Japan experienced a simultaneous bubble in its stock market and its real estate market. The collapse of these bubbles has derailed its economy for more than a decade. A similar collapse in the United States, coupled with a poor policy response, could have similar consequences here.”
Dean Baker, “The Run-Up in Home Prices: Is it Real or Is it Another Bubble?,” Center for Economic and Policy Research, Briefing Paper, August 2002, pp. 3–4; see also 14–15.
Those are insightful predictions.

Furthermore, by 2004 onwards, we can also find Marxists identifying a housing bubble and coming economic crisis:
Nick Beams, “Greenspan Testimony Points to Deepening US Fiscal Crisis,” World Socialist Web Site, 16 February 2004.

Nick Beams, “Australia at the Forefront of Housing Bubble,” World Socialist Web Site, 27 September 2004.

César Uco, “Is the US housing boom turning toward bust?,” World Socialist Web Site, 6 August 2005

Nick Beams, “US Housing Crisis could Spark Serious Economic Downturn,” World Socialist Web Site, 3 September 2007.
Now does anyone seriously think that these correct identifications of an asset bubble in housing vindicates the Marxist theory? Some Marxists tell us that Marxist theory explains the 2008 financial crisis, but I do not think so at all. And even if some Austrians called an asset bubble in housing, it does not follow at all that their underlying economic theory is right.

Both Austrians and Marxists have economic theories that are fundamentally flawed, even though some of them correctly identified a housing bubble. The doctrinaire Marxists have their absurd historical materialism, the belief that the rate of profit will always fall, the erroneous labour theory of value, and the idea that socialism is inevitable, while many Austrians have a system flawed by a fantasy business cycle theory, an incoherent and logically inconsistent demand for no fractional reserve banking, and insufficient attention to subjective expectations and the role of investment decision-making under uncertainty.

It is obvious that Austrians identifying a housing bubble from 2003–2004 onwards should not regarded as having any special predictive power. They were merely identifying an on-going phenomenon. It is, furthermore, notable that when some Austrians identified a housing bubble in the first half of 2002, so too did the Keynesian economist Dean Baker.

We must remember that any “predictions” after 2002 are not even predictions at all: they represent people identifying an existing asset bubble that was becoming worse.

I. Alleged Austrian Predictions: 1999–2003

Let us review some of these alleged “predictions” below in chronological order from 1999–2003 cited by Walter Block:
(1) Thomas J. DiLorenzo, “Regulatory Sneak Attack,” Mises Daily, September 16, 1999.
There is no prediction of any housing bubble in this article: it is mostly an attack on US government regulation. At one point, DiLorenzo attacks the “Community Reinvestment Act,” complaining that it forces bank “to make bad loans and grants to politically-connected ‘community groups.’” That, however, is not any prediction of a housing bubble in the 2000s.

(2) Ron Paul, “A Republic, If You Can Keep It,” US House of Representatives, January 31 and February 2, 2000.
In this speech, Ron Paul does not predict any housing bubble in the 2000s. The closest Paul comes to any sort of prediction on housing is here:
“If one cares about providing the maximum and best housing for the maximum number of people, one must consider a free-market approach in association with a sound non-depreciating currency. We have been operating a public housing program directly opposite to this, and along with steady inflation and government promotion of housing since the 1960s, the housing market has been grossly distorted. We can soon expect a major downward correction in the housing industry, prompted by rising interest rates.”
Yet it is obvious that Paul is here thinking of a correction of existing 2000 housing prices, not a massive 2000s bubble in real estate and a financial crisis in 2008. The word “soon” strongly suggests Paul was expecting the correction in the next year or two after 2000, as from 1999–2000 the Fed had raised the Federal Funds rate and was widely expected to raise it further in 2000, owing to the dot.com boom. This speech shows no prediction of the 2000s housing bubble.

(3) William L. Anderson, “The Party is Over,” Mises Daily, February 20, 2001.
A careful reading of this article shows clearly that Anderson nowhere predicts the housing bubble of the 2000s. In fact, the words “houses,” “housing,” “homes”, or “bubble” do not even appear in the article at all. Anderson does make this remark about real estate:
The stock market boom and various real estate booms have either ended or are nearing their end and the next stage of money growth will now affect consumer prices.”
In other words in February 20, 2001, William Anderson thought the stock and real estate booms of the 1990s had ended or were about to end: there is no prediction of a massive continuing housing bubble in the 2000s. We also have this priceless gem from Anderson praising financial deregulation:
“the amount of economic regulation has fallen tremendously in the past three decades. In 1970, all the financial, transportation and telecommunications sectors were highly cartelized industries. All are much more open and competitive today. In fact, one can easily declare that the prosperity of the 1990s would not have been remotely possible without removal of government restrictions that hampered those industries in the 1960s.”
Unfortunately, it was the deregulated financial sector that was the main cause of the 1990s and 2000s bubbles.

(4) Ron Paul, Congressional Record, US House of Representatives, September 5, 2001.
Here Ron Paul identified the emerging housing bubble (quoted in Paul 2008: 220):
“Refinancing especially helped the consumers to continue spending even in a slowing economy. It isn’t surprising for high credit-card debt to be frequently rolled into second mortgages, since interest on mortgage debt has the additional advantage of being tax-deductible. When financial conditions warrant it, leaving financial instruments (such as paper assets), and looking for hard assets (such as houses), is commonplace and is not a new phenomenon. Instead of the newly inflated money being directed toward the stock market, it now finds its way into the rapidly expanding real-estate bubble. This, too, will burst as all bubbles do. The Fed, the Congress, or even foreign investors can’t prevent the collapse of this bubble, any more than the incestuous Japanese banks were able to keep the Japanese ‘miracle’ of the 1980s going forever …. With the current direction of the dollar certainly downward, the day of reckoning is fast approaching. A weak dollar will prompt dumping of GSE securities before treasuries, despite the Treasury’s and the Fed's attempt to equate them with government securities. This will threaten the whole GSE system of finance, because the challenge to the dollar and the GSEs will hit just when the housing market turns down and defaults rise. Also a major accident can occur in the derivatives markets where Fannie Mae and Freddie Mac are deeply involved in hedging their interest-rate bets. Rising interest rates that are inherent with a weak currency will worsen the crisis.”
A video of this speech is here:



This was an identification of the bubble and prediction of a “bust.” Some six months later, Dean Baker said much the same thing. However, Ron Paul predicted that a “weak dollar will prompt dumping of GSE securities before treasuries”: he was wrong. It was the bursting of the real estate bubble and defaulting mortgages that prompted the crisis in mortgage backed securities: the financial crisis then occurred in the investment banking sector and spread to the commercial banking sector. No dumping of US treasuries occurred. These failed predictions have to be borne in mind, with Paul’s prediction of a housing market crash.

(5) James Grant, “Sometimes the Economy Needs a Setback,” New York Times, September 9, 2001.
This article does not predict or identify any housing bubble. Instead it is a discussion of the 1990s tech boom and US business cycle.

(6) Gary North, “How the FED Inflated the Real Estate Bubble by Pushing Down Mortgage Rates: Report As of 2002,” Reality Check, March 4, 2002.
Unfortunately, this is not available online, but as an identification of the housing bubble it was made only a few months before Dean Baker published his own identification of it, and Baker was no doubt also coming to this conclusion in the months before August: so here an Austrian like Gary North simply displayed the same insight as a prominent Keynesian.

(7) Robert Blumen, “Fannie Mae Distorts Markets,” Mises Daily, June 17, 2002.
Robert Blumen refers in passing to the housing bubble here in this 2002 article, but this was also the same time that Dean Baker was calling the bubble: so again an Austrian commentator displayed the same insight as a prominent Keynesian at much the same time. What is particularly interesting about Robert Blumen’s analysis is that he denies that houses are capital goods, the usual absurd trick that Austrians use to try and make the housing bubble fit in with their Austrian business cycle theory:
“A careful parsing of Raines’s and de Soto’s statements is required to arrive at a consistent understanding. A home is an asset, and it is wealth, but it is not capital in the economic sense; i.e., it is not a good that is an intermediate artifact of a time-consuming production process. Housing is a consumption good. True, it is a durable consumption good, and it may rise in value over time for many reasons, but it is not capital.”
Blumen also observes correctly that much of the 2000s mortgages were in fact refinancing and home equity loans, and the debt incurred used to pay credit card debt or fund purchasing of consumer goods: this is the opposite of the process required by the Austrian business cycle theory, which requires credit flows to capital goods investment (I will return to this issue below in section III).

(8) Walter Block lists “undated” predictions or identifications of a housing bubble by Peter Schiff, but such undated predictions are worthless.

Some Austrians claim that Schiff predicted the housing bubble in an interview in May 2002, which you can watch below in these videos.





Peter Schiff does not predict or identify any housing bubble in this interview. The interviewer (not Schiff) refers briefly to “housing prices up” (in part 1), but that is all. Instead, Schiff predicts a bear market in US stocks from 2002 onwards (a false prediction); and a US dollar collapse that would send US interest rates through the roof (another false prediction). At 7.25 onwards (in part 1), Schiff refers to a “bubble” that already exists, but it is clear he is referring to stocks and shares, not housing. So much for Schiff’s predictive power.

(9) Hans F. Sennholz, “The Fed is Culpable,” Mises Daily, November 11, 2002.
In the first part of his article, Hans F. Sennholz merely talks about the 1990s tech boom in stocks and shares. He states that “[e]conomic bubbles have plagued the American economy ever since the First United States Bank opened its doors in Philadelphia in 1791,” but conveniently forgets that the US had no central bank for most of the 19th century, yet asset bubbles also occurred frequently. In a rather surprising analysis, Sennholz seems to think that raising margin requirements could have helped to prevent the 1990s tech bubble, which can only mean that he is suggesting that appropriate financial regulation should have been imposed to prevent it (a strange view for an Austrian).

Towards the end of his analysis, Sennholz identifies the housing bubble and predicts a bust:
“The most ominous of all cycles, which touches millions of people, is the boom-and-bust sequence in real estate. Just as in equity markets, these bubbles are clearly visible in their price-earnings ratios or price-rental ratios that greatly exceed those of healthy markets. Abundant credit at bargain rates of interest causes housing prices to soar, especially in growing communities, which fosters not only feverish construction activity but also enlarges the mountains of debt, even consumer debt. Fannie Mae, the publicly owned and government-sponsored Federal National Mortgage Association, reports that soaring housing prices and falling mortgage rates are allowing homeowners to refinance $1.4 trillion of mortgages in 2002, up from $1.1 trillion last year. In both years homeowners are estimated to take out some $100 billion in equity. The real estate bubble is bound to burst as soon as the distortions become visible to ever greater numbers of participants.”
However, Dean Baker had already done this months before Sennholz in August 2002. Moreover, Sennholz makes an inaccurate prediction: he calls a “U.S. Treasury bubble,” and predicts that “the bubble will burst and the market value of all notes and bonds will drop drastically.”

(10) William L. Anderson, “Recovery or Boomlet?,” Mises Daily, July 7, 2003.
In this Mises.org article, Anderson talks of a “mini-boom,” but it is clear he is thinking of the stock market and general economic conditions, not an asset price bubble in housing:
“In recent weeks, the stock market has staged a mild rally. Though the most recent unemployment numbers are well over six percent, Republicans, as well as a few market analysts, are claiming that the long overdue economic recovery has arrived. While I wish that were the case, the facts demonstrate otherwise; this is not a recovery, but simply an unsustainable mini-boom that makes the long-term economic picture even worse. .... Thus, any upturn whether in economic statistics or in the stock market is almost certain to follow the patterns not of economic recovery but rather a mini-boom. I say ‘mini’ because there is no way that this particular boom, as pathetic as it is, can be sustained for a long time, unlike the boom of the late 1990s. In fact, the Fed's recent actions can only force more malinvestments which themselves will have to be liquidated in the future.”
William L. Anderson, “Recovery or Boomlet?,” Mises Daily, July 7, 2003.
In short, there is no identification of an asset bubble in housing here.

(11) Ron Paul’s Address to the House Financial Services Committee, September 10, 2003.
This speech was delivered on September 10, 2003 (you can read it in Paul 2008: 380–381), and Ron Paul correctly identifies (not predicts) an on-going housing bubble and predicts troubles for indebted homeowners:
“Despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government's policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged overinvestment in housing.”
You can also watch this speech quoted here:



However, this was over a year after Dean Baker had correctly identified the bubble too, and predicted a serious downturn when the bubble collapsed. Ron Paul displayed no great predictive power here.
So what are our conclusions from this analysis?

When we review the various alleged Austrian “predictions” of the 2000s housing bubble most of them collapse. Of the eleven claims made, six (54%) do not even identify the housing boom, and certainly do not predict any such thing. Two (18%) identify the bubble, but after Dean Baker did (in August, 2002).

The 2002 identification of the bubble by Gary North (March 4, 2002) and Robert Blumen (June 17, 2002) was only a few months before Dean Baker’s paper published in August 2002, and Baker himself must have been coming to the same conclusion in these months. So these Austrians just displayed much the same insight as a progressive Keynesian economist.

The only early identification of the housing bubble that does stand out is that of Ron Paul in a speech to the US House of Representatives on September 5, 2001. However, even here Ron Paul made a number of failed predictions, so his predictive power was hardly spectacular.

II. What about After 2003?
The Austrians showed no great predictive power in 2003 or afterwards in identifying the bubble and the economic effects of a crash. There were heterodox and Post Keynesian economists who predicted a financial crisis caused by a housing bubble and excessive debt. The most obvious example is the Post Keynesian Steve Keen of the University of Western Sydney (Australia), who from 2006 was predicting a major financial crisis (see Steve Keen, “‘No-one saw this coming’ Balderdash!” July 15th, 2009, Debtwatch.com).

Moreover, Dirk Bezemer, Professor of Economics at the University of Groningen (Netherlands), has also done a survey of economists and economic commentators trying to establish who predicted the crisis by looking at those with (1) a serious economic model that was used in analysis, (2) predictions that went beyond identifying the property bubble to the implications for the real economy, (3) predictions on the public record, and (4) correct estimates of the timing of the crisis (see Dirk Bezemer, “‘No One Saw This Coming’: Understanding Financial Crisis Through Accounting Models,” Groningen University, 16 June 2009). Here is Bezemer’s list, with my additions in italics:
Forecast date: 2002
Dean Baker, US, Co-director, Center for Economic and Policy Research;

Forecast date: 2005
Fred Harrison, UK, Economic commentator

Forecast date: 2006
Dean Baker, US, Co-director, Center for Economic and Policy Research;

Michael Hudson, US, Professor, University of Missouri;

Steve Keen, Australia, Associate professor, University of Western Sydney;

Jakob Brøchner Madsen, Denmark, Professor, Copenhagen University;

Robert Shiller, US, Professor, Yale University;

Nouriel Roubini, US, Professor, New York University;

Kurt Richebächer, US, Private consultant and investment newsletter writer;

Forecast date: 2007
Wynne Godley, US, Distinguished scholar, Levy Economics Institute of Bard College;

Eric Janszen, US, Investor and iTulip commentator;

Peter Schiff, US, Stock broker, investment adviser and commentator.
Now of these eleven commentators and economists:
(1) Five (45%) are Heterodox/Progressive Keynesians or Post Keynesians (Baker, Godley, Hudson, Keen, Sorenson);

(2) Two (18%) are basically maverick neoclassicals (Roubini and Shiller);

(3) Two (18%) are in the Austrian tradition (Richebächer and Schiff).

(4) One (Fred Harrison) calls himself as a Georgist (a follower of Henry George)

(5) One is a combination of Austrian and Post Keynesian (Janszen).
(on the classifications, see Barkley Rosser, J. “Did Heterodox Economists Do Better At "Calling It" Than Mainstream Ones? August 28, 2009).
So in other words eight (72%) of the eleven made accurate predictions about the bubble and crisis and were non-Austrians. The largest group (45%) were actually Heterodox Keynesians.

The idea that Austrian economists were the only ones to predict the actual crisis of 2008 is utterly false. Moreover, just because some Austrians correctly called the housing bubble, it simply does not follow that the Austrian Business Cycle Theory (their explanation of the crisis) has been vindicated. Many other economists from different schools also called the housing bubble and a financial crisis. Are we, for example, to say that because Fred Harrison correctly predicted a housing bubble that his actual Georgist economics is therefore proven right? This simply does not follow, nor does it follow that Austrian economics is correct, merely because some Austrians identified the housing bubble as Harrison did.

III. The Austrian Business Cycle Theory (ABCT) does not Explain the Crisis

The Austrian Business Cycle Theory (ABCT) holds that central bank fiat money or fractional reserve banking-induced increases in credit (unbacked by commodity money) drives down the monetary rate of interest, causing it to go below the Wicksellian natural rate of interest. This causes malinvestment in capital goods sectors. However, the unique Wicksellian natural rate of interest does not exist, and is a pure fantasy (see here and here). The ABCT does not explain or deal with reckless lending by banks to people for mortgages or consumer goods, and nothing about financial or real asset bubbles, and nothing about financial crises. The irrelevance of ABCT to the real estate bubble of the 2000s and financial crisis of 2008 can be seen in a passage in Rothbard’s Man, Economy, and State (2004 [1962]: 994–1008):
“What happens, however, when the increase in investment is not due to a change in time preference and saving, but to credit expansion by the commercial banks? …. What are the consequences? The new money is loaned to businesses.110 These businesses, now able to acquire the money at a lower rate of interest, enter the capital goods’ and original factors’ market to bid resources away from the other firms. At any given time, the stock of goods is fixed, and the [new money is] … therefore employed in raising the prices of producers’ goods. The rise in prices of capital goods will be imputed to rises in original factors. The credit expansion reduces the market rate of interest. This means that price differentials are lowered, and … lower price differentials raise prices in the highest stages of production, shifting resources to these stages and also increasing the number of stages. As a result, the production structure is lengthened. The borrowing firms are led to believe that enough funds are available to permit them to embark on projects formerly unprofitable.

[footnote]
110 To the extent that the new money is loaned to consumers rather than businesses, the cycle effects discussed in this section do not occur. (Rothbard 2004 [1962]: 995–996).
After this, Rothbard (2004 [1962]: 996–1004) expounds ABCT in its usual form. But his footnote has profound significance: “[to] the extent that the new money is loaned to consumers rather than businesses, the cycle effects discussed in this section do not occur.” In other words, the mechanisms causing recession or depression as postulated by both Rothbard’s theory and the earlier Hayekian versions of ABCT do not occur if the money is mainly loaned to consumers! ABCT assumes that newly created credit money is mainly loaned out to businesses (causing malinvestments in capital goods), and not to consumers to a significant degree. In this case, we can already see that Rothbard’s version of ABCT cannot be a serious explanation of the housing bubble in the 2000s and the financial crisis of 2008, because credit flowed to housing, a consumption good.

Moreover, many of these mortgages loans were refinancing and home equity loans, and the money obtained from the debt not used for new housing construction at all, but to pay credit card debt down or purchase more consumer goods. In fact, the Austrian Robert Blumen’s (June 17, 2002) admission that houses are not capital goods severely contradicts the Austrian Business Cycle Theory explanation of the 2000s crisis.

Conclusion

The best the Austrians have is a Ron Paul identification (not prediction) of the emerging housing bubble in late 2001, with a number of other false predictions, such as his idea that a “weak dollar will prompt dumping of GSE securities before treasuries.” Other Austrians were also wrong in predicting a collapse in the value of US Treasury notes and bonds. In particular, Peter Schiff’s failed predictions in May 2002 also stand out. Above all, Ron Paul was followed only six months later by the Keynesian Dean Baker also calling a housing bubble and a serious crisis when that asset bubble collapsed.

Furthermore, many economists from 2002–2004 – Marxists, maverick neoclassicals, New Keynesians, Post Keynesians, and even a Georgist – also called the housing bubble and predicted a severe economic crisis.

Addendum

A graph of US housing prices in constant dollars can be seen here:
USA CPI-Deflated House Price Index.
http://www.debtdeflation.com/blogs/wp-content/uploads/2008/03/IMG0005_739046.PNG
It is obvious that astute observers could have see an explosion in housing prices by 2000-2002. The idiocy of the Austrian business cycle theory was not necessary to see the astonishing upward trend, or to call a bubble.


BIBLIOGRAPHY

Paul, R., 2008. Pillars of Prosperity: Free Markets, Honest Money, Private Property, Mises Institute.

Rothbard, M. N. 2004 [1962]. Man, Economy, and State: A Treatise on Economic Principles, Ludwig von Mises Institute, Auburn, Ala.

48 comments:

  1. When you say "The Marxists have their absurd historical materialism, the belief that the rate of profit will always fall, the erroneous labour theory of value, and the idea that socialism is inevitable"you mean "some marxists" right?

    If not, then I would like to read your analysis of each one of these topics in relation to what Marx said and what was done by latter day followers. Its a bit more complicated than to imply ALL...

    ReplyDelete
  2. Anyone else besides Dean Baker and Nick Beams?

    You're talking two people out of perhaps ten thousand or more, while the Austrians had a much higher percentage in house.

    Unfortunately, it was the deregulated financial sector that was the main cause of the 1990s and 2000s bubbles.

    False. It was years of credit expansion backed by the Federal Reserve that was the main cause of the 1990s and 2000s bubbles.

    Regulations cannot stop credit expansion causing bubbles. It is precisely regulation that encourages it.

    EVERY SINGLE ONE of your attempts to deny that the Austrian predictions of a housing bubble were predictions of a housing bubble, have utterly failed. You're dishonestly looking for the exact words "housing bubble". That is not required. If an Austrian says "The housing market has been distorted due to years of credit expansion and artificially low interest rates, and this is going to result in a major correction down the road once the malinvested resources are revealed and learned."

    That would be a prediction of a housing bubble, even though those words were not used.

    You pick two economists out of probably over ten thousand, and you quibble dozens of Austrian economists (which right there is a rather LARGE portion of the total number of Austrians) who predicted the housing bubble and hilariously deny that these predictions are not predictions because you don't see the exact words "I, Mr. X, hereby doth solemnly swear that I predict a housing bubble".

    Pathetic. Orwell would be proud. Next thing you'll tell us is that we have always been at war with Eastasia.

    ReplyDelete
  3. "Ian J. Seda Irizarry said...

    When you say "The Marxists have their absurd historical materialism, the belief that the rate of profit will always fall, the erroneous labour theory of value, and the idea that socialism is inevitable"you mean "some marxists" right?"


    Yes, I have changed it to "doctrinaire Marxists".

    ReplyDelete
  4. Ian, Lord Keynes in this case is right.

    Marx did in fact argue those things. If someone does not adhere to those things, then they cannot be considered Marxist.

    I used to be a hardcore Marxist. Do you want references and citations for these things that Marx believed?

    ReplyDelete
  5. "You're talking two people out of perhaps ten thousand or more, while the Austrians had a much higher percentage in house."

    Most of the alleged "predictions" cited in Walter Block's LewRockwell article, in the crucial period 1999-2003, are just rubbish, not even any reference to real estate, houses, housing or bubbles, and certainly not predictions of any bubble.

    ReplyDelete
  6. "You're talking two people out of perhaps ten thousand or more, while the Austrians had a much higher percentage in house."

    "Most of the alleged "predictions" cited in Walter Block's LewRockwell article, in the crucial period 1999-2003, are just rubbish, not even any reference to real estate, houses, housing or bubbles, and certainly not predictions of any bubble."

    False. All of them are not rubbish. All of them mention distortions in the market due to credit expansion and artificially low interest rates. Most of them mention housing specifically.

    You'll have to do better than this. This is just sad.

    You have two non-Austrian authors, and a cornucopia of Austrian authors, predicting a market/housing bubble.

    It's not even close.

    ReplyDelete
  7. "You're talking two people out of perhaps ten thousand or more, while the Austrians had a much higher percentage in house."

    The Post Keynesian school does not constitute "ten thousand or more". It is a much smaller heterodox school.

    Your objection might be raised against mainstream neoclassicals/adherents of the new consensus macroeocnomics, but with respect to Post Keynesianism it is garbage.

    "You're dishonestly looking for the exact words "housing bubble".

    No, I am not. I looked for any reference to housing/real estate bubble or asset price inflation, expressed in any words.

    If an Austrian says "The housing market has been distorted due to years of credit expansion and artificially low interest rates, and this is going to result in a major correction down the road once the malinvested resources are revealed and learned."

    And most of them didn't even say that, idiot.

    E.g., tell me where Anderson says "housing market has been distorted due to years of credit expansion and artificially low interest rates... etc." here:

    http://mises.org/daily/1265

    http://mises.org/daily/617

    Or James Grant:

    http://www.nytimes.com/2001/09/09/opinion/09GRAN.html?ex=1001147153&ei=1&en=898b/8611aaca6946

    Or DiLorenzo:

    http://mises.org/daily/297

    Or Peter Schiff

    ReplyDelete
  8. I for one would like those citations from Marx.

    Would also be intersted to understand what is "absurd" about historical materialism.

    ReplyDelete
  9. You have two non-Austrian authors, and a cornucopia of Austrian authors, predicting a market/housing bubble.

    You are a risible liar.

    Forecast date: 2002
    Dean Baker (Post Keynesian), US, Co-director, Center for Economic and Policy Research;

    Forecast date: 2004
    Nick Beams (Marxist)

    Forecast date: 2005
    Fred Harrison (Georgist), UK, Economic commentator

    Forecast date: 2006
    Dean Baker again (Post Keynesian), US, Co-director, Center for Economic and Policy Research;

    Michael Hudson (Post Keynesian), US, Professor, University of Missouri;

    Steve Keen (Post Keynesian), Australia, Associate professor, University of Western Sydney;

    Robert Shiller (New Keynesian), New Keynesian US, Professor, Yale University;

    Forecast date: 2007
    Wynne Godley (Post Keynesian), US, Distinguished scholar, Levy Economics Institute of Bard College;
    ---------

    Learn to count:

    4 Post Keynesians
    1 New Keynesian
    1 Georgist
    1 Marxist


    That makes 7.

    And this list is far from exhaustive.

    ReplyDelete
  10. "You're talking two people out of perhaps ten thousand or more, while the Austrians had a much higher percentage in house."

    "The Post Keynesian school does not constitute "ten thousand or more". It is a much smaller heterodox school."

    And you cited Dean Baker, who you claim "SEEMS to be "associated" with the Post Keynesian school." LOL

    Where are all those who are explicitly Post Keynesians? Where are their prescient predictions?

    "Your objection might be raised against mainstream neoclassicals/adherents of the new consensus macroeocnomics, but with respect to Post Keynesianism it is garbage."

    Silence is even worse.

    "You're dishonestly looking for the exact words "housing bubble"."

    "No, I am not."

    Yes, you are. You even said, on multiple occasions:

    "No mention of "housing bubble"."

    "If an Austrian says "The housing market has been distorted due to years of credit expansion and artificially low interest rates, and this is going to result in a major correction down the road once the malinvested resources are revealed and learned."

    "And most of them didn't even say that, idiot."

    Yes, they did, idiot.

    "E.g., tell me where Anderson says "housing market has been distorted due to years of credit expansion and artificially low interest rates... etc."

    http://mises.org/daily/617

    "For many years, Americans have been told that we can have easy money from Alan Greenspan’s Federal Reserve and no perceptible inflation, all at the same time."

    "As has been expressed on this page many times before, there is no "new economy" any more than the "New Economics" of the 1960s had solved the problems of the business cycle, as its promoters had claimed. Instead, those who lived through the 1960s and 1990s, while seeing much economic growth, also witnessed massive malinvestments of capital through easy money policies of the Fed."

    ReplyDelete
  11. "4 Post Keynesians"

    Where are their statements,other than the Baker ones you've referenced?

    ReplyDelete
  12. (1) Your statement:
    "If an Austrian says "The housing market has been distorted due to years of credit expansion and artificially low interest rates, and this is going to result in a major correction down the road once the malinvested resources are revealed and learned" etc.

    (2) Anderson's statement:
    "For many years, Americans have been told that we can have easy money from Alan Greenspan’s Federal Reserve and no perceptible inflation, all at the same time." ... etc

    No reference to housing there.

    All that Anderson sa's about real estate is here:

    "The stock market boom and various real estate booms have either ended or are nearing their end and the next stage of money growth will now affect consumer prices."

    In other words in February 20, 2001, William L. Anderson thought the stock and real estate booms of the 1990s had ended or was about to end: no prediction of a massive housing bubble in the 2000s. Good work, fool.

    ReplyDelete
  13. "And you cited Dean Baker, who you claim "SEEMS to be "associated" with the Post Keynesian school." "

    Baker is without any doubt a heterodox Keynesian. According to Steve Keen, he self identifies as a Post Keynesian. Keen is in a position to know.

    http://econospeak.blogspot.com/2009/08/did-heterodox-economists-do-better-at.html

    ReplyDelete
    Replies
    1. Christof's original point was that there are 10,000s of Keynesians. I'm willing to guess he was including post-Keynesians as well. Way to get off topic. Don't be ashamed of being part of the establishment, I wish I was.
      - Jesse

      Delete
  14. LK, just for the record, you may wanna check what another Georgist economist said. Fred Foldvary (I think that's his name, or very similar), wrote in 1998 that "if no war or major event happens, I expect the housing bubble to explode in 2008". I swear it's true. I'm a Post-Keynesian, I think you may wanna check somethings of Eric Tymoigne in 2006 about the household indebtedness. And see Jan Kregel, he knew for sure. But that Foldvary has a merit. He was right on the year, 10 years earlier.
    Pablo

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  15. Yes, there does seem to be a prediction from him here:

    "That puts 1998 in the middle of the short-run boom, coinciding with an election year when the politicians try to avoid any slowing of growth. Any economic problems due to the year-2000 computer problem will most likely occur in 1999 or 2000, not 1998.

    The major cycle is tied to the real-estate cycle. The last major downturn was around 1990, which would put the next major recession around the year 2008. The US economy recovered from the major bottom and has entered the boom phase. Unemployment is low, profits are up, inflation is low, interest rates are low, and real estate is booming, with vacancies low, rents rising, and construction picking up. With the short and major cycles expanding, a recession is unlikely, though always possible."


    Fred E. Foldvary, "Will There Be a Recession?", The Progress Report, 1998

    http://web.archive.org/web/20011123103024/www.progress.org/archive/fold19.htm

    If true, this was a prescient prediction, and he beats Ron Paul by 3 years, and of course Paul never predicted the year of the crash.

    ReplyDelete
    Replies
    1. Ok, so crashes are tied to election years...wait. Pretty sure that's luck. And he even said that a recession is unlikely. For knowing the exact year of the crash he seems unsure if it will even happen. Possible, I mean put him on the big board, but doesn't seem like he was confident in his theory
      - Jesse

      Delete
    2. Actually it was one year before that. In 1997, Foldvary wrote an article called "The Business Cicle: A Georgist-Austrian Synthesis" whose conclusion says:
      "The Austrian and geo-economic theories have been incomplete, and the
      synthesis is mutually complementary, Austrian theory providing the role of
      interest rates and the capital-goods structure, and geo-economics identifying
      the key capital-good malinvestment and the role of land speculation
      and fiscal policy.
      The 18-year cycle in the US and similar cycles in other countries gives
      the geo-Austrian cycle theory predictive power: the next major bust, 18
      years after the 1990 downtum, will be around 2008. If there is no major
      interruption such as a global war."

      Delete
  16. LK: Have you read Keen's "A Marx for Post Keynesians"? The best way I can argue in favor of Marx to you is, I think, recommending that paper thoroughly. After that, I can explain where I think Keen is mistaken in breaking ranks with him. That'd be a lot easier than basically making the whole case from the ground up.

    For a while, I identified as a fan of Post Keynesian economics who was somewhat wary of Marx. The former hasn't changed, but I've learned to stop worrying and love the latter, as it were. So, I'm sympathetic to your position.

    I recognize that I may not convince you, and that's fine. I think we basically agree on most policy points, even if our analysis differs.

    Christof:
    I used to be a hardcore Marxist.


    Hey remember when we were exploring this? So... what happened, dude? You kind of bailed on me. That was when you retired Pete for David, I guess?

    ReplyDelete
  17. “while many Austrians have a system flawed by a fantasy business cycle theory, an incoherent and logically inconsistent demand for no fractional reserve banking, and insufficient attention to subjective expectations and the role of investment decision-making under uncertainty.”

    1)ABCT is not flawed. 2)Not all Austrians are against FRB, you of all people should know this. 3)Austrians continually, continually stress subjectivity and uncertainty with regards to investment. Time and time again Austrians have said uncertainty is required for human action. And anywhere, from Mises to Rothbard, Austrians have written that the existence of the entrepreneur and profits and losses are due to uncertainty. To say they ignore it is absolute hogwash.

    If this is an attack against “equilibrium constructs”, Austrians (explicitly Rothbard) have repeatedly mentioned that they are fundamental to deriving economic laws. Just because a market can never be equilibrated doesn’t mean that a market tries to equilibrate.

    “The Austrian Business Cycle Theory (ABCT) holds that central bank fiat money or fractional reserve banking-induced increases in credit (unbacked by commodity money) drives down the monetary rate of interest, causing it to go below the Wicksellian natural rate of interest. This causes malinvestment in capital goods sectors. However, the unique Wicksellian natural rate of interest does not exist, and is a pure fantasy (see here and here). The ABCT does not explain or deal with reckless lending by banks to people for mortgages or consumer goods, and nothing about financial or real asset bubbles, and nothing about financial crises.”

    You never responded to my last post (http://socialdemocracy21stcentury.blogspot.com/2011/11/another-keynes-versus-hayek-debate.html). Rothbard was able to define the natural interest rate as time preference expressed through money. Interest is the premium on present goods (money that can be spent on present consumption) over future goods(money that is earned from investments and can be spent on future consumption). It is a premium on present consumption versus future consumption, EXPRESSED through money. Whether or not Mises explicitly said this is immaterial.

    ReplyDelete
  18. “After this, Rothbard (2004 [1962]: 996–1004) expounds ABCT in its usual form. But his footnote has profound significance: “[to] the extent that the new money is loaned to consumers rather than businesses, the cycle effects discussed in this section do not occur.” In other words, the mechanisms causing recession or depression as postulated by both Rothbard’s theory and the earlier Hayekian versions of ABCT do not occur if the money is mainly loaned to consumers! ABCT assumes that newly created credit money is mainly loaned out to businesses (causing malinvestments in capital goods), and not to consumers to a significant degree. In this case, we can already see that Rothbard’s version of ABCT cannot be a serious explanation of the housing bubble in the 2000s and the financial crisis of 2008, because credit flowed to housing, a consumption good.

    Moreover, many of these mortgages loans were refinancing and home equity loans, and the money obtained from the debt not used for new housing construction at all, but to pay credit card debt down or purchase more consumer goods. In fact, the Austrian Robert Blumen’s (June 17, 2002) admission that houses are not capital goods severely contradicts the Austrian Business Cycle Theory explanation of the 2000s crisis.”

    Another, slightly different quote is more helpful.

    “But loans to consumers QUA [emphasis added] consumers have no ill effects”. (Rothbard, AGD, p.80)

    Everyone is a consumer. Businessmen are all consumers. Loans are made to businessmen. Does this mean the ABCT doesn’t apply to them? Ordinary “consumers” can clearly act as investors (as many of them did) during the housing bubble because they believed that a house was a great investment. People not only bought houses to live in and enjoy in the present, but as an investment that would always appreciate in value and they could sell in the future and earn a handsome return, and as an investment now that allowed them to increase present consumption. In this respect, they acted like any other investor. Houses, just like any good, can be capital goods based on how an actor subjectively evaluates them. People saw houses as a intermediate good to earning additional money in the future. That’s all that is needed to make them a capital good, in the eyes of consumers.

    And so, due to very low interest rates and other government incentives, people were mislead to believing a home is a great investment and people could buy houses (long term investments) they clearly couldn’t afford and profit in the future. Resources (additional scarce factors used in constructing new houses or putting on “additions” because people treated it as an investment to capital) and financial resources were all channeled into this enterprise (along with other general business loans/malinvestments) while consumers were increasing becoming more and more short term oriented with an explosion in credit card debt and a collapse in savings, partly due to the housing bubble, because people started to borrow off their equity. The intertemporal tug of war still occurred.

    Not to mention an explosion in consumer loans exacerbates the business cycle problem by aggravating the price spreads between the expanding long term projects (due to credit expansion for investments) and short term projects due to the increase in consumption and time preferences.

    ReplyDelete
  19. Lord Keynes:

    "If an Austrian says "The housing market has been distorted due to years of credit expansion and artificially low interest rates, and this is going to result in a major correction down the road once the malinvested resources are revealed and learned" etc."

    "All that Anderson sa's about real estate is here:"

    "The stock market boom and various real estate booms have either ended or are nearing their end and the next stage of money growth will now affect consumer prices."

    "In other words in February 20, 2001, William L. Anderson thought the stock and real estate booms of the 1990s had ended or was about to end: no prediction of a massive housing bubble in the 2000s. Good work, fool."

    You idiot. In 2001, the Federal Reserve had not yet begun its massive credit expansionary phase 2001-2006. If the Fed did nothing in 2001, then the housing bubble would have popped, it would have been a smaller bust, and the resulting correction would have been smaller.

    You can't blame Anderson for not being able to predict future human choices of Fed members. One can only predict bubbles once the Fed begins to inflate. That's why it wasn't until 2003, that it was clear the Fed was inflating, that Austrians again began to sound the bubble alarm.

    Egads, do you have any idea about the logical categories of economic phenomena, and how it is IMPOSSIBLE to predict future human choices?

    Anyone who predicts future human choices using equations and whatnot are engaging in astrology, and if they are right, they got lucky.

    This is why you see the Austrians articles talking about credit expansion and inflation and artificially low interest rates, once they have accelerated. If the Fed lowers rates, and the banking system expands credit, then Austrians will say that this will generate a bubble. Austrians cannot however predict if and when the Federal System will in fact choose to inflate and by how much.

    ReplyDelete
  20. When writing in the 1930s, Hayek did not foresee the widespread use of consumer credit and credit cards. The same types of distortions arise from consumer credit created out of nothing as with loans to entrepreneurs for capital goods due to impairment of economic calculation.

    By the 1970s, several of these views had been moderated or modified (Hayek, 1978 and 1979; White, 1999; and Pizano, 2009). Hayek (1979, p. 41) placed more emphasis on misdirection of production from general Cantillon effects. Hayek came to believe (an empirical observation) that it was no longer true that the dominant way new money and credit entered the spending stream was through credits to entrepreneurs. He reduced his emphasis on the more specific capital structure, credit-induced distortions.

    http://mises.org/journals/qjae/pdf/qjae14_3_1.pdf

    Since you somehow cannot comprehend the nature of economic calculation or human exchange, you continuously embarrass yourself with these silly claims that the ABCT does not apply to consumer housing or that it is devastating to the Austrians that there might be millions of “natural” rates of interest out there as opposed to one.

    ReplyDelete
  21. "Hayek came to believe (an empirical observation) that it was no longer true that the dominant way new money and credit entered the spending stream was through credits to entrepreneurs. He reduced his emphasis on the more specific capital structure, credit-induced distortions."

    And funny how dozens of idiot Austrians still use Hayek's classic 1930s version of ABCT when discussing the 2000s: you're essentially telling us that many of your fellow Austrians are incompetent.

    ReplyDelete
  22. "People not only bought houses to live in and enjoy in the present, but as an investment that would always appreciate in value and they could sell in the future and earn a handsome return, and as an investment now that allowed them to increase present consumption. In this respect, they acted like any other investor. Houses, just like any good, can be capital goods based on how an actor subjectively evaluates them. People saw houses as a intermediate good to earning additional money in the future."

    That does not make them capital goods: that is asset price speculation.

    By the same argument my buying an antique painting and holding it in expectations of a rise in its price on a market means that the
    antique painting must be a cpaital goods. But it is not: it is an asset.

    ReplyDelete
  23. "Not to mention an explosion in consumer loans exacerbates the business cycle problem by aggravating the price spreads between the expanding long term projects (due to credit expansion for investments) and short term projects due to the increase in consumption and time preferences. "

    (1) Except many consumer goods aren't even produced in America, but in East Asia and other developing nations.

    (2) the US was far from full employment 2001-2008 and far from high capacity utilization

    http://research.stlouisfed.org/fred2/series/TCU

    (3) The US had idle resources 2001-2008 available for capital goods investment.

    (4) The US also had international trade and imports to provide goods for capial goods investment.

    ReplyDelete
  24. "Hayek (1979, p. 41) placed more emphasis on misdirection of production from general Cantillon effects. "

    Cantillon effects provide no serious argument against government spending or stimulus:

    http://socialdemocracy21stcentury.blogspot.com/2011/09/are-cantillon-effects-argument-against.html

    ReplyDelete
  25. "Since you somehow cannot comprehend the nature of economic calculation or human exchange, ... "

    Yes, obviously, since you say so, I must be incapable of comprehending the concept of voluntary "human exchange". LOL.

    ReplyDelete
  26. "Rothbard was able to define the natural interest rate as time preference expressed through money."

    The time preference theory of interest rates is unsound. Robert Murphy's is a good place a place as any to read to see why:

    http://socialdemocracy21stcentury.blogspot.com/2011/07/robert-p-murphy-on-pure-time-preference.html

    Murphy, Robert P. 2003. Unanticipated Intertemporal Change in Theories of Interest, PhD dissert., Department of Economics, New York University. pp. 58-126.

    Robert P. Murphy, "Some Problems with the
    Pure Time Preference Theory of Interest,"
    http://mises.org/journals/scholar/murphy2.pdf

    Robert P. Murphy, "The Abstinence Theory of Interest," Mises Daily, November 06, 2003
    http://mises.org/daily/1369

    ReplyDelete
  27. you're essentially telling us that many of your fellow Austrians are incompetent.

    I suppose that's true. But the true "idiots" are people who support funny money dilution and "stimulus" to solve the problem that does not exist, a "lack of aggregate demand".

    Further, the purchase of collectibles as an inflation hedge is simply another feature of the funny money regime. In a free market with constantly falling prices, there would be no need for an "inflation hedge". And it's just another way that the rich and sophisticated can profit while the unsophisticated and poor are looted of purchasing power under the funny money regime.

    ReplyDelete
  28. Egads, do you have any idea about the logical categories of economic phenomena, and how it is IMPOSSIBLE to predict future human choices?

    Predicting general outcomes based on an understanding of the balance sheet of the economy and the dynamics of debt is very different from guessing what present Barbara will buy from which store and for whom, or even whether she will at all, etc.

    Think of it this way: it is not a contradiction for you to claim to recognize a cause/effect relationship between the interest rate and bubble formation, yes? Why? You have no way of knowing for sure that people will make choices that will result in a bubble. And yet you can make this claim with some certainty. This is because the macroeconomic claim you are making is not dependent on knowing the outcome of a particular human's choice. So too with Post-Keynesian macroeconomics.

    This crisis was not a "black swan"; those who think it was are looking at the wrong details.

    ReplyDelete
  29. >you're essentially telling us that many of
    > your fellow Austrians are incompetent.

    I suppose that's true.


    Refreshingly candid, I must say.

    ReplyDelete
  30. For the interested readers looking for my response to Lord Keynes' replies to mine, he has decided not to post my response due to apparent "repetition" of prior arguments he has had.

    ReplyDelete
  31. Lord Keynes:

    "The time preference theory of interest rates is unsound."

    No, it is not unsound. And liquidity preference supporters should be the last to say that time preference theory is unsound, for liquidity preference theory has already been thoroughly debunked.

    1. Liquidity preference predicts that the lower the preferences for money, the lower will be the interest rates, and the higher the preferences for money, the higher will be the interest rates. This claim is easily debunked by just considering periods of rapid (not hyper) inflation. With rapid inflation, the desire to hold money significantly falls, but interest rates RISE, they do not fall as liquidity preference predicts. Similarly, if rapid inflation were to recede, and become "normal" inflation, then the desire to hold money would increase back up, and yet interest rates FALL, they do not rise as liquidity preference predicts.

    2. If people attempt to increase their cash balances, then the long run effect of this will be to RAISE the rates of profit and hence rates of interest. This is because as businesses attempt to sell their assets and as they offer lower prices for assets, both in attempt to hold more cash, this will lower the market prices and hence lower the accumulated capital value of capital invested in the economy. But since consumption spending still generates a revenue, it means that the rates of profit on capital invested will rise, and when that happens, rates of interest will rise as well. This is also opposite to what liquidity preference predicts.

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  32. Liquidity preference predicts that the lower the preferences for money, the lower will be the interest rates, and the higher the preferences for money, the higher will be the interest rates.

    You're confusing a (1) monetary theory of the interest rate with (2) Keynes's original "liquidity preference theory of the inrerest rate".

    Post Keynesians do not accept Keynes's original "liquidity preference theory of the inrerest rate": the benchmark interest rate - the base rate - is set by the central bank in a modern economy.

    ReplyDelete
  33. At any given time, the stock of goods is fixed

    In what way is this actually true? A hell of a lot of goods are produced on demand, and industrial managers tend to try to make their processes more like that in order to reduce inventory.

    Obviously there's a short-term limit to how much production of a given good could scale up. But it's usually a mistake to assume you're on the production possibility frontier. A *lot* of neoclassical, libertarian, and Austrian thinking relies on the assumption that industrial capacity utilisation is 100% flat to the boards on any given Tuesday, and this has never been empirically true.

    In fact that FRED series seems to show a decline over the last 40 years...

    ReplyDelete
  34. Given that a point on the production possibilities frontier is not much more than potential GDP, it is obvious many, many capitalist economies historically have run well below their potential GDPs - not to mention the fact that international trade can provide resources when they become scarce anyway.

    ReplyDelete
  35. Megan Mcardle: http://www.janegalt.net/blog/archives/001104.html

    Paul Krugman: http://www.nytimes.com/2005/05/27/opinion/27krugman.html

    The Morgan Stanley economist Mcardle mentions is probrably the Stanley S. Roach, Krugman mentions.

    Krugman also cites Paul Mcculley as predicting a housing bubble.

    ReplyDelete
  36. BIG PICTURE:
    The reason why the Austrians are so aggressive about being vindicated is because those Austrians who predicted the collapse share the same basic theory, the fundamentals of which go back to Mises, and even in a crude fashion centuries earlier. Ever since, Austrians have accurately recognized every major boom-bust cycle, making if-then predictions that regularly hold true.
    All other schools, however, never give a majority consensus that proves right. It is always a small minority within the school who ever wind up being right. After all, someone is likely to make a lucky prediction now and again. Meanwhile, the large majority were completely off the mark.
    So, if we are comparing schools of thought and their predictive track record, it's hardly even a contest. Find a Keynesian who predicted the bust, and I will find thousands who were flat wrong. But among the Austrians, despite numbering in the dozens or maybe hundreds, about all of them saw the collapse coming at some point, the most promenant publically made predictions, and none were totally wrong.
    It isn't true that more Keynesian predicted the collapse. And even if it is, the Austrians are the ones to go for advise about what's to come.
    - Jesse Cohen

    ReplyDelete
    Replies
    1. "Ever since, Austrians have accurately recognized every major boom-bust cycle, making if-then predictions that regularly hold true." Since when? That is like predicting they will be earthquakes in the future which does not count. "But among the Austrians, despite numbering in the dozens or maybe hundreds, about all of them saw the collapse coming at some point, the most promenant publically made predictions, and none were totally wrong." So with people who predicited earthquakes.

      Delete
    2. IIRC Austrian's predicted the Great Depression, the end of Breton-Woods, the hyper-inflation of the 70s, the S&P(sp?) Loan crisis of the late 80s, the Japanese bubble of the 80s and the subsequent ongoing recession they've had, the NASDAQ bubble of the 90s, the rise of precious commodities of the 2000s, the housing bubble of the 2000s, the ongoing recession of 2008 and on, and have been dead-on regarding the outcomes of federal reserve policy once it has become available.

      If they are right again, we're waiting for the public debt crises around the world to implode along with a US Dollar crisis.

      Delete
    3. I've not seen Austrian predictions of most of these things, and frankly doubt they ever did.

      Also, there was no "hyper-inflation of the 70s". That period was one of stagflation. Big difference.

      The claims that Austrians predicted the Great Depression are also hollow:

      http://socialdemocracy21stcentury.blogspot.com/2012/02/lionel-robbins-and-myth-of-hayeks.html

      http://socialdemocracy21stcentury.blogspot.com/2011/05/mises-did-not-predict-us-stock-crash-of.html

      Delete
  37. I for one am sick to my stomach with the Austrian white noise. If I had a penny for every time someone triumphantly used the phrase "What, you mean the same economists that failed to predict the global financial crisis?" I would be a very, very wealthy man.

    On top of your debunking of the "extraordinary predictive powers" of ABCT, it should be mentioned that fringe economists, the majority associated with the right-wing, have been forecasting economic calamity literally since the end of World War 2. Some major "reasons" given for the impending collapse of civilization include the cost of rebuilding Europe, a Russian financial assault, the US withdrawal from the gold standard in '73, and the unprecedented Reagan-era peacetime deficits. Their forecasting power is less than zero. They have simply cried wolf too many times.

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  38. If Marx were immortal, and still alive today, he likely would have discarded most or all of his theories at some point. If he hadn't, he would rightly have been labeled a crackpot ideologue, not an economist. To a great extent he wasn't satisfied being "just an economist", but then again, few economists back then were scientists more than they were ideologues or philosophers.

    If economics is truly to be a science, it has to be informed by models and data. It has to change over time, develop more accurate paradigms, and replace its paradigm beliefs eventually. Too much of economics schools are still organized along ideological lines, with their respective orthodoxies. All this to the great discredit, and perpetual retardation of economics as a science.

    ReplyDelete
  39. Austrians have predicted several things like the great depression, savings & loan crisis, dot-com bust, recent economic crisis.

    Some mainstream economists have confessed that ABCT is correct and this recent economic crisis proves it.

    I saw a video were Paul Krugman says he has no clue if we are going into a recession or not. In fact a lot of these mainstream economists are questioning the quality of today's mainstream economists since not too many predicted the recent economic crisis.

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  40. Anonymous@January 11, 2013 6:37 AM

    The alleged Austrian predictions of the Great Depression are mostly myths; as I have shown above, many other economists from heterodox Keynesian schools predicted the current crisis.

    Just because some few neoclassicals might have become sympathetic to the ABCT, it does not make the ABCT true.

    Also, Austrians have plenty of failed predictions too: predictions of hyperinflation, collapse of the US dollar, Ron Paul's prediction that a “weak dollar will prompt dumping of GSE securities before treasuries”, etc.

    ReplyDelete
  41. Lord Keynes - I think you are going about this wrong way. In a way you are falling into their traps - you need to be more precise.
    Austrians ARE always predicting crisis - so inevitably they will be right sometimes. When was the last time you heard an Austrian claim that the rate of interest was too high? Isn't this lack of symmetry a bit suspicious. If there is an optimum why is the central bank always below it? And if it is always below it - where is the broad inflation?

    But what I think you should do is
    1. point out that there isn't really A rate of interest. There is whole family of interest rates both a term structure and a risk structure. You need to talk about the whole structure to make a coherent analysis because a single rate is fairly meaningless.
    2. point of the importance of uncertainty in "economic calculation". Show that interest rates are a small consideration in this calculation - it simply is a flea on a walrus. If my estimate of future income can vary by 50% why does a 0.5% change in interest rates bother me.
    3. point out the importance of the difference between ex-post and ex-ante savings - and the difference between the real concept of savings (i.e. non-consumption) and the financial concept of savings (i.e. money in the bank) and how this is often confused. Ex-post savings ALWAYS equals ex-post investment - so if lower interest rates encourage investment - they will also create savings. But planned consumption will INCREASE with lower interest rates (because savings is less rewarding) - so what gives. Answer - nominal income must rise - so either prices or output must rise. So where is this relative price change (towards investment goods) coming from. Consumption goods prices must also rise if we are full employment. (And that is ignoring the contrary effect of consumer credit). Their partial equilibrium analysis is simply faulty.
    4. Point out that "a housing bubble" is not really a "housing bubble", but a land price bubble - and land is not capital. Any over building of houses at the end of the bubble has more than reversed - but it is the debt remaining that is the issue. Trying to make this a real economy issue, rather than a financial story is deliberate blindness.

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  42. Lord Keynes, that you point out only one Marxist wouldn't be fair. Apart that you should use your adjectives for other schools of thought more wittily...
    Sweezy and Magdoff (1987) they were pointing out the financialisation of the economy and the re-direction of investment to non-productive projects, e.g. houssing bubble.
    Magdoff et al. (2002, 2003, 2004...) and I can keep on indefinitely from the Monthly Review were arguing the emergence of a housing bubble in the US out of the sluggish economic growth...
    Jose Manuel Naredo (which does not fall within any school) during the late 90s and early 2000's nd other Marxists in Spain (Diego Guerrero) were pointing out a housing bubble in Spain.

    Maybe you should open your eyes before criticising so harshly!!! As we say in spanish: "from the mouth dies the fish", or you'll become a doctrinaire.

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