In an interview with CNBC today Danielle DiMartino Booth, a former adviser to recently retired Dallas Fed president Dick Fisher, refers to Ludwig von Mises as ”my long-departed hero.” She notes that Mises ”coined the term malinvestment” and “wrote about it extensively.” She characterizes the housing crisis as a “very identifiable bubble” that was “an outlet for the malinvestment” caused by easy money. She goes on to warn
I think today though we are dealing with several bubbles. And now that central bankers around the world are engaged in a currency war of sorts, now it has gone global. I worry about the credit markets quite a bit, I worry about the stock market, I worry about the commercial real estate market, you name it.
In the op ed upon which her interview is based, Booth uses Austrian business cycle theory to explain the demise of the once deeply entrenched myth that Fed monetary policy under Greenspan generated a Great Moderation:
Not too long ago, in a land not so far away, the business cycle was declared to be defeated. Policymakers at the Federal Reserve were credited with slaying the pesky beast that featured recessions as part of its nature. Such was the faith in the permanence of business cycle’s demise that the era was given its own label, The Great Moderation, a perfect world in which inflation ran not too hot or too cold and profit growth was accepted as the steady state.
As is so often the case, reality rudely disturbed nirvana’s prospects. The Great Moderation devolved into the Great Recession precipitated by one of the most devastating financial crises in U.S. history. The veneer of calm advertised over the prior years was stripped away. In its stead, economists had to concede that an era of benign monetary policy had encouraged malinvestment, the scourge that Austrian Ludwig von Mises warned of in the early 20th century. An overabundance of debt, if left unchecked, inevitably leads to the misallocation of resources. In the case of the first years of the 2000s, the target was, of course, the housing market.
HT: JMP and EW
