It Just Might Be Time to Listen to the Austrians
"The latest Keynesian money-printing and spending schemes are blowing up. It is time to hear what the Austrians have to say."
A part of the article:
The thing to note in the above example, however, is that even though the entire subprime mortgage industry was full of bad incentives from top to bottom—from its ultimate government backstopping to the originate-to-distribute model of mortgage lending, from the opaque nature of the synthesized derivatives being traded to the obvious conflicts of interest between ratings agencies and their clients who came demanding investment-grade ratings for bonds that even they sometimes knew were utter junk. These mortgage-backed securities were the most profitable investment going for the entire decade before the crash.
Driving this sentiment was a story: that US housing prices historically only went up. In the actual real estate market, this greater fool assumption was borne out by numerous examples of buyers buying with the intention of simply reselling six months later. By 2007, flipping had become a national cottage industry!
It is clear in retrospect that a peculiar though familiar recursive loop fueled the crisis: the returns on mortgage-backed securities spurred increased demand, which prompted a search for more supply until the mortgage originators finally ran out of prime and even reasonable subprime lending candidates. But even at the time, as housing prices rose precipitously, several prominent economists warned publicly of an impending crash, and some individual and institutional investors took big positions against the mortgage-backed securities market via credit default swaps. Those insightful and daring few got paid, while the rest lost out.
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For the Austrian, this example can be applied more broadly: What should one do when, from their perspective, the overwhelming majority of market participants are making systematic mistakes not only in asset pricing but in their assumptions about money, interest rates, even value?
Austrians understand real value, profit, better than any other economic school—but that doesn’t mean they are immune to choice architecture or to the madness of crowds. While in the long run, true value always wins out, in the short to medium term, prices are bound up in market sentiment, momentum, and many other things that make all prices, “always wrong in retrospect,” as efficient market hypothesis theorist Eugene Fama admitted. This is because complete information is difficult to obtain in hindsight, and impossible to obtain in the actual moment.
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Client demand for returns might build bubbles, but bad monetary policy is what allows them to grow to truly dangerous proportions. Today, it should be clear to everyone that the Federal Reserve kept the latest party running far too long.
The question now is how much further down there is to go.”
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The Founding of the Mises Institute - John Denson (Audio) - An interesting audio - JRD
John Denson talks about Lew Rockwell’s dream (the founder of the Mises Institute and his (John’s) dream. John Denson, at that time, was on the Board of Trustees of Auburn University. JRD
“Judge Denson shares memories of his role in the founding of the Mises Institute. Recorded at the Mises Institute in Auburn, Alabama, on 27 July 2016, at a special reception in honor of John V. Denson's birthday.”