Governments Wave Magic Wand; Ludwig von Mises Turns in His Grave

The AP headline blares "European governments offer $2 trillion for banks", making U.S. efforts to cure what ails credit and financial markets look wimpy by comparison.

Will it work? Who knows? So far, so good.

Stock markets are soaring all around the world, a discernible easing is now being seen in credit markets, and some small level of confidence is returning.

European governments say they are putting nearly $2 trillion on the line to protect the continent's banks through guarantees and other emergency measures.

Pledges by Britain, Germany, France, Spain, Austria and Portugal in recent days have reached a total of $1.96 trillion. The sums are considered a maximum, and might not all be spent if the financial crisis eases.

Many of the pledges came Monday, a day after the 15 nations that use the euro currency agreed on an unprecedented bank rescue plan.

It is as if there is an infinite supply of money and credit on which to draw.

Well, actually, there is no upper limit on the amount of money and credit that the world's central bankers and politicians can summon to help make things better.

Ludwig von Mises must be turning in his grave.

Some excerpts from The Theory of Money and Credit:

"The essence of a credit-expansion boom is not overinvestment, but investment in wrong lines, i.e., malinvestment."

"What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit boom is built on the sands of banknotes and deposits. It must collapse."

"If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders."

"Credit expansion is the governments’ foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous."

"The final outcome of the credit expansion is general impoverishment."

Obviously, the world's firefighters are now much too busy putting out the raging fires to worry about any water damage that might result.

Comments

[johngonole:]

I haven't read Mises myself but from everything I've read and heard quoted from him I think I've basically arrived at the same conclusions. Ultimately there is no free lunch. How free are we really anymore? I personally would rather risk a depression then see this country and apparently most of the rest of the world slip into Fascism and socialism.

2008 Oct 14 02:18 AM

[huskerbob:]

Mises point is that for the government to avoid meddling is not to risk a depression. An economic downturn is inevitable after this level of malinvestment!
Government intervention only serves to confuse the markets, reward the fools instead of the wise, punish those who do right instead of wrong, enrich the rich and further impoverish the poor.
The Europeans are being lauded for investing directly in financials in exchange for a return to previous lending levels. Does it make sense to perpetuate the problem?
If the government would stay out, the poorly managed companies could be liquidated and absorbed by the well managed companies less affected by the crisis. What could be more simple? Lenders with cash to lend would extend credit only to the strongest. Good management and sober decision making could be rewarded, and poor decision makers and malinvestors would be punished. But let's put taxpayers on the hook for billions and do it backwards, because "it's the only solution".

2008 Oct 14 05:55 AM

[erkuzman@ms...:]

Apparently there is an assumption that there will never be a day of recogning in the financial markets. This would be fine, but; IS IT POSSIBLE??????

2008 Oct 14 10:13 AM

[OldLimey:]

A short post which says it all. Thanks.

2008 Oct 14 10:32 AM

[carey_jim:]

I think the Austrian school (German speaking) rose in opposition to the German Historical school (Germany) which devalued (but didn't completely reject) the theory of economic models developed by Menger, Walras, et. al,

The Austrian school also arose to combat socialism which was on the ascendancy all over Europe and in Russia, of course.

Austria was a center of German culture before World War II and had a very great influence on the world. The Austrian school also stood in direct opposition to the National Socialism of Germany under Hitler.

Hitler's socialism proved to be unbelievably good for the German economy but at a huge cost in human values for Germany and the rest of the world, obviously.

The bottom line is, I don't think it is possible to see the Austrian School School apart from this history of socialism in Europe.

America is still the heartland of free enterprise and it's no surprise that both Hayek and von Mises landed here. Hayek was also associated with the Chicago school of Frank Knight which produced Milton Friedman and Joseph Stigler among others.

While it looks as if the United States is headed toward more social and economic controls, we need to keep this movement within historical perspective.

To help get a little perspective, here is a quote from Hayek who shared most of the views of von Mises:

"Economic security is often represented as an indispensable condition of real liberty. In a sense this is both true and important.

Independence of mind or strength of character is rarely found among those who cannot be confident that they will make their way by their own effort.

But there are two kinds of security:

1) the certainty of a given minimum of sustenance for all and

2) the security of a given standard of life, of the relative position which one person or group enjoys compared with others.

There is no reason why, in a society which has reached the general level of wealth ours has, the first kind of security should not be guaranteed to all without endangering general freedom; that is: some minimum of food, shelter and clothing, sufficient to preserve health.

Nor is there any reason why the state should not help to organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision.

It is planning for security of the second kind which has such an insidious effect on liberty. <b>It is planning designed to protect individuals or groups against diminutions of their incomes."</b> (Compare with the attempt of the government to protect the the financial and real estate sectors today in the United States. )

From The Road to Surfdom
Friedrich Hayek.

2008 Oct 14 02:17 PM

[carey_jim:]

I've been trying to be funny with my posts as a method of keeping our sanity intact among so much bad news, but that piece of humor was unintended.

Whatever the case, I think most of us would rather be on the Road to Surfdom than the Road to Serfdom :)

Happy waves.

2008 Oct 15 12:28 AM