Two books have recently been published on post-2007-2008 financial crisis history. The first is The Lords of Easy Money: How the Federal Reserve Broke the American Economy by Christopher Leonard and it is my favorite of the two. Mr. Leonard describes the post-crisis financial environment extremely well in a way that is consistent with Austrian Business Cycle Theory (ABCT) without naming it. I expected this as the author is a journalist writing for a mass audience rather than a financial professional.
The second book is The Price of Time: The Real Story of Interest by Edward Chancellor. This book is significant given its title, subject matter (interest rates history) and its recent distinction of being awarded the 19th annual Hayek Book Prize by the Manhattan Institute. Given the economic events that have unfolded since 2008, a history of interest rates from an Austrian economics perspective should be a page turner.
As I read The Price of Time I was struck both by how often the author quoted and referenced mainstream economists (e.g., Keynes, Irving Fisher), and by the limited, high-level discussion of ABCT. At the end of that discussion, it was correctly concluded that, “If accuracy of prediction is what matters for economic theory, as Milton Friedman later claimed, then Hayek’s interpretation [i.e., ABCT] should have become the received wisdom of his profession. Yet the Austrian’s interpretation of the 1920s and its aftermath has been more or less air-brushed from the history books, while Fisher’s monetarist view has become received wisdom” (p. 101).
Note that prediction accuracy is core to the scientific method regardless of the late Milton Friedman’s claims. Nonetheless, from this point on, the narrative of the book could have been framed around: (1) the historical record, (2) mainstream narratives surrounding that record, and (3) ABCT-based interpretations to evaluate those narratives relative to both the expected and actual consequences of the employed monetary policies. The last point is important because differences between the expected and actual consequences of the employed monetary policies are generally ignored by political leaders, mainstream economists and their media outlets. It therefore warrants highlighting here, especially since the income transfers following the 2008-plus monetary policies have received media coverage.
It is well known that easy monetary policies—such as “quantitative easing” in all its forms—benefit the financial sector because that sector receives and uses the new money before everyone else. The stated intent of those policies is to flood the financial sector with new money (i.e., liquidity, which artificially depresses interest rates) so that sector will liberally grant credit to the real economy to fund real growth initiatives. That is not what has happened since 2008; instead, the new money pumped into the system generally circulated across the financial sector thereby benefiting that sector, and the sectors that exploit it (e.g., via debt-fueled share buybacks and corporate development deals), at the expense of the real economy.
As new money flooded into the financial sector it generated income and returns that benefited top-tier institutions and investors at the expense of main street. Significantly, those institutions and investors are powerfully incentivized to lobby for sustained easy money policies, which continues to be overlooked and ignored. As Joseph Salerno observed:
In general, the question of “Cui bono?”—or “Who benefits?”—from changes in policies and institutions receives very little attention… This is not to deny that new economic historians have sought to explain the ex post aggregate distribution of income that results from a given change in the institutional framework or in the policy regime. What their method precludes them from doing is identifying the ex ante purposes as well as ideas about the most efficacious means of accomplishing these purposes that motivated the specific individuals who lobbied for or initiated the change that effected a new income distribution (History of Money and Banking in the United States: The Colonial Era to World War II by Murray Rothbard, p. 9).
To illustrate the importance of this consider the following: Ben Bernanke accepted a lucrative position with a large financial institution (Citadel) at the conclusion of his Fed chairmanship. Similarly, Janet Yellen earned $710,000 to $760,000 from a large financial institution (also Citadel) for speeches following her Fed chairmanship. At the very least, behaviors like this—and unfortunately there are many of them—are foreseeable conflicts of interest that should have been considered and managed prior to radical monetary policies being continued following the 2007-2008 crisis. Significantly, these behaviors should also be subject to intense review, analysis and debate at the highest levels of government as well as in the media and in academia, but that has not occurred.
The Lords of Easy Money profiles developments like the above well for a lay readership. The closest that The Price of Time comes to explaining why it did not approach its narrative this way, even though it touches on it, was during a discussion of The Road to Serfdom by Friedrich Hayek:
Although the Austrian economist [Hayek] wrote extensively elsewhere about monetary policy and interest rates – and, in particular, how easy money interfered with the economy’s ‘steering mechanism’ – these topics are not directly addressed in The Road to Serfdom. Nevertheless, since the setting of interest rates is just one aspect of central planning, Hayek’s concerns are relevant to our understanding of the post-Lehman world (p. 295).
I understand that mainstream-friendly readers make up a large percentage of the people who buy financial history books. However, why not rigorously employ a theory like ABCT that not only contrasts mainstream theories and actions, but has also performed well in practice (e.g., Reflexivity, Business Cycles and the New Economy by Joseph Calandro) and is known to many financial services professionals and investors? I then reviewed the book’s bibliography and noted that it lists several Austrian economics texts including: Hayek’s Monetary Theory and the Trade Cycle, Mises’s Human Action, and Rothbard’s Americas Great Depression, which deepened my confusion.
Not knowing the author, I contacted several friends who are both professional investors and knowledgeable of ABCT to discuss this and to get their opinions on it. Two reasons were generally offered to potentially explain the omission of a rigorous ABCT discussion in a book like this. The first aligns with earlier observations; namely, mainstream economics-friendly readers make up a large percentage of people who buy financial history books suggesting that the narrative may have been tailored to appeal to that readership.
Second, following the financial crisis, some proponents of ABCT repeatedly predicted sharp increases in consumer price inflation, which until recently had not materialized, and a market collapse, which has yet to occur. These premature predictions negatively impacted practical coverage of ABCT, which may have influenced the author.
A few comments about financial prediction in general. First, as investment and financial practice involves quantitative, qualitative and behavioral aspects financial prediction tends to be more directional than precise. Therefore, it is both appropriate and valuable to conclude in certain circumstances that the risk of a severe loss is high and should be actively managed. In contrast, it is generally not appropriate to predict the precise timing of a market’s collapse because no one knows, or can know, that.
Second, when mainstream economists and reporters mention inflation they do so in the context of the Consumer Price Index (CPI), the usage of which is generally rejected by Austrian economics (e.g., The Many Failures of the CPI by Mark Thornton). Nevertheless, CPI is widely used so it is important to understand that it is a calculated number, not a scientific number, and its calculations have been changed over time for a variety of reasons. The practical consequences of this are significant, e.g., in October 2022, inflation as measured by the then current calculation methodology of the CPI was 7.7 percent, which was a multi-decade high. However, if you measured CPI using the calculation methodology from 1980, it would be double that amount. CPI is therefore not representative of the true consumer burden of easy money policies, and as such it is not conducive to practical strategic financial analyses.
Last, while consumer price inflation did not emerge as quickly as many of us thought—and that includes me—asset inflation kept occurring as new money kept being pumped into, and circulating across, the economy. Understanding that money pumped into an economy will generate effects as it enters and circulates through (and/or across) that economy is a valuable thing to both know and actively track. Doing so can help to inform both asset allocation and risk management strategizing from both an investment and corporate finance perspective. This could have been driven home in The Price of Time factually via descriptions of central banks’ monetary interventions and the resulting effects, and then contrasted with ABCT-based analyses. Such an approach would have been powerful, especially when compared to mainstream economists’ recorded claims and narratives, and those of their media outlets.
In closing, all three of the books mentioned in this article are worth reading, most especially The Road to Serfdom given the social and political trends of the United States. Financially, I would start with The Lords of Easy Money and then The Price of Time.
