The crash from an Austrian perspective

Nick Thornsby

"2. The crash has nothing to do with greed. Or, rather, greed is no more to blame for these bad mortgages than gravity is to blame for plane crashes. Gravity is always present, just like greed."

Is it just me, or does the first sentence of first this point contradict the rest?

Surely what is actually being said is that the financial crash had *everything* to do with greed, just as a plane crash has *everything* to do with gravity?

OK, you might not be able to do anything to 'stop' greed (if you wanted to) - or gravity - but, if the analogy works, what you can do is reduce the risk that gravity will result in a plane crash by making the planes work as well as possible.

So in actual fact, greed clearly did cause the crash (or was a contributing factor) - the question once one accepts that that greed is inevitable is how one stops it resulting in another crash - or, perhaps more pertinently, another bubble.

denis cooper

There is an intellectual error at the root of it all, and that's believing that three years is "long term".

As in having so-called "long term incentive plans" for senior managers which typically run for that kind of period, positively encouraging them to manage the business for the short term and in the worst cases to milk the business for all it's worth while the going's good.

You can read it here about Stephen Hester:

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8248374/RBS-chief-Stephen-Hester-awarded-a-2.5m-bonus.html

"A source close to RBS said that Mr Hester had received no payments other than salary and pension contributions since he arrived, and that all long-term incentive share awards received to date do not pay out until 2012 at the earliest."

He arrived in 2008, so it's a reasonable assumption that the first "long-term" incentive share award was made in 2009, and that will pay out merely three years later in 2012.

A proper "long-term" incentive plan would spread the additional rewards out over a period which was significantly longer than the economic cycle, say at least twenty years, so that their total value would depend on the performance of the company during bad times as well as good times.

yank

Quite amusing, that this leftist publication, the Spectator, is now brazen enough to drape itself in Hayek.

I guess the EU and Dave's 2.9% pay raise to them, the VAT increase, the global warmingism and other of the sainted coalition's top-down constructs somehow comport with Hayek, then?

A fatal conceit, indeed.

Victor Southern

Yet again we read of the sanity that artificially low interest rates harm an economy.

Why do so many governments and central bankers take the opposite view in the face of all evidence to the contrary.

Australia, a shining beacon in advanced economies, has a cash rate of 4.75% and inflation at 2.8%. Employment there has reached an all-time high. Their reserve bank recognised that a decent interest rate is necessary to encourage savings.

James Sproule

First of all, more posts like this one please.

On the idea that greed is a root cause. Greed as you correctly note may always exist, but it needs something more to be allowed to run rampant. That something more was a chronically weak monetary policy. Gravity always exist independently, greed needs an accomplice.

The problem to my mind is that fixing the mess will take time, too much time for politicians seeking to "do something".

So if the Austrian diagnosis is correct (and it is better than any other) the practical political question is how to give economies the time the need to recover without indulging in wrong headed and damaging legislation or reckless spending which at least the portion that is not inflated away, must be repaid.

Given most politicians and commentators are utterly unaware why things went wrong, it seems unlikely we will come to a effective solution. At least we are so broke, we are not throwing good money after bad through quantitative easing.

Mark

Although the Austrian school provides a useful counterpoint to the current economic consensus, it's not without its flaws.

For one thing, there's some evidence that slashing interest rates to near zero has staved off a much worse crash. The Austrian theory would have if anything increased interest rates, in the process making the crash worse.

Personally, I'm inclined to think Austrian insights are useful in avoiding bubbles in the first place but Keynesian or Monetarist solutions are more useful if a bust actually happens.

joelcotterell

see my view here

http://www.youtube.com/watch?v=Gob2MTksItE

copy and paste to hear my thoughts please

lids

Chatting with a mate in the know over the weekend, he forecast Portugal and Spain to go down this year, along with the Bank of Santander.

Should be an interesting 12 months..

raymond jones

merican cage and the European cage
WOOPS misfire

John birch

I am sorry but the idea that how this mess happened is a mystery, is beyond belief ! I and guys I worked with could see this coming years ago.
The simple fact that you cannot spend more than you earn holds true for households and countrys.
The only variable is how long you can get away with it before the lender wants his money back.
I think the situation that we are in is a victory for bin laden, after the twin towers came down bush told Americans it was thier patriotic duty to get out there and shop. Not get out there and make things we can sell to people to earn money . Get out there and shop !!!
That tells you what sort of society you have.
Then interest rates came down to encourage people to spend rather than save and a few years the shit hits the fan and we are supposed to be suprised .

charles hercock

OK So we should raise interest rates

Why will that not give us the doudle dip we fear?

kinglear

What everyone completely ignores and forgets is what used to be called the German Wirtschaftwunder, overseen by the Bundesbank over many years. The secret? Increase the money supply by around 2% year in year out and force up interest rates whenever growth started to accelerate. The Germans saved heroically, expanded their economy year in year out,had the strongest currency in the world for decades ( revaluation - not something we know anything about), which in itself held down inflation and forced them to make continual improvements in their efficiency and efforts to export.WE on the other hand, have always looked for and used the opposite strategy( placebos for the masses), which has ditched us where we are now

Marcher Baron

"We need to let the healing take place and encourage savings that create capital and wealth." I'll drink to that! The sooner interest rates go up the better.

Think This

I was wondering when Fraser would get round to posting something on Austrian economics after I spyed him at the ASI Austrian economics primer book launch. Glad to see that the print media are starting to take an interest in Austrian economics (I know one or two MP's are as well). Perhaps one day we'll see a return to honest money after all!

2trueblue

The cause had a greed element in that everyone thought that they did not need to save for anything. Credit bacame too easy and there was no plan made for repayment. The new dynamic in monetary terms was born, have it now. A financial advisor was selling us something and when asked to explain it he could not. We put our pension in cash back in april 2007 as it was beginning to unravel.
Housekeeping is the same, you have to have something to back up your level of borrowing. That is the key that is missing now.

Innes Bowen

CoffeeHousers might like to know that the Radio 4 series Analysis will be broadcasting a programme about the resurgence of interest in Austrian economics. Monday 31st Jan at 8.30 pm. It'll be available as a podcast too. Jamie Whyte is presenting.

normanc

Interesting article, and I read another recently by Nigel Lawson. I won't go into all the details but a lot of it is covered here but one point he made strongly is made above - that recession is recovery. It cuts all the dead wood out of the economy and forces those who survive to tighten up and improve efficiency.

He blames governments for trying to abolish boom & bust (where have I heard that before?) instead of embracing the natural cycle, and in the end they always make things worse.

I'd never actually looked at it like that but there is a lot of sense in it.

Hugo Chav

King Lear,

You are bang on.

It is the capital structure of the UK economy that is causing us continual boom & busts of the most violent kind. In my lifetime there have been three major property bubbles that popped violently. This latest one is the most violent as lending became insane and our culture was swamped in property porn. Even loads of MPs were in it big time!! Flipping merrily away!

We need savings. We need a Central Bank that combats property bubbles with tight money. We need an LSA (Lifetime Savings Account) that simplifies the SIPP & ISA. No tax relief in and no tax take on the way out. The LSA can invest in cash, bonds, equities and commmerical property.

How about capital gains tax on residential property.

In a nutshell we must realign the capital structure so that capital goes into to productive assets not consumptive.

No of the above will happen and we will continue on our path to becoming an Undeveloping Nation. We are like a company falling down the FSTE All Share rankings, soon to be a Small Cap. The glory days of Empire and being a titan are well and truly over.

A country whose elite are minded as social workers, not hard headed businessmen like in Asia or Germany, has a much poorer future.

Baron

good stuff, Fraser, and surprisingly correct. Brown’s ‘no boom no bust’ provided the philosophical underpinning for the insanity, the BoE obliged with lowering the cost of money at any sign of the growth weakening, the banks greedily jumped at it with new financial instruments of credit creation, the unwashed bought it, no chance for the weak, inefficient, highly speculative to get weeded out - a perfect, near ultimate Ponzi scheme.

Derek

"...we baristas are a little nervous about the lack of proper analysis after the crash, and the speed with which everyone blamed it on the bankers".

If I remember correctly, most people blamed it on the politicians who in turn then blamed it on the bankers. In the USA, it was the Clinton administration who insisted that banks make housing loans to those who had no means to repay them. In Great Britain, it was the "Brown administration" that abandoned good housekeeping in a similar attempt to buy a constituency by inflating government spending way beyond its means.

The longer term cause in the USA and Great Britain was largely the function of the central bank's addiction to the wanton printing of fiat currency. Whether the central banks are bankers or politicians is a nice question - but they are certainly not bankers in the normal sense of the word.

The crash came as no surprise to the "gold bugs" and sites such as USA Gold or Gold Forum had been predicting it, monitoring its incubation, and publishing the ideas, among others, of the Ludwig von Mises Institute, for at least twelve or more years - when the price of gold was somewhere around $280-290 an ounce. This, it will always be remembered, was not long before Gordon Brown sold off 60% of our gold reserves without consulting the Bank of England.

The Ludwig von Mises Institute publishes a wealth of articles on its website at http://mises.org/daily/

mattghg

"It’s not often we do a post based on a think-tank talk – we may do more, if CoffeeHousers find them useful."

I for one found it useful and would appreciate more posts like this in the future.

Fatbloke on tour

Trevor

It just gets worse and worse.

You are now scouring the economics world looking for a theory, any theory that can explain the credit crunch without implicating the city.

Please get over the shock, it was the banks and their casino / big bookies mentality that has caused all the problems. It was greed, herd instinct and a cast of insiders that did all the damage.

All governments could / should have done more to calm them down but the easy money was too good to be true or ignore.

As for your sudden interest in all things Austrian, when I first heard I thought you were looking for a new burd but now you have clarified the situation it all becomes clear.

It all becomes clear why you, NL and all the other dry as dust, establishment orthodoxy lovers, ConDem dog boilers all love Austrian economics.

It is not because it offers a complete insight into the birth of the crash, it doesn't but that is not what you are after. You and all the people like you are interested in Austrian economics because of the remedy it puts forward.

Slash and burn, a depression as the way forward, the Austrian school are the true dog boilers and that is why you want to talk about it.

In your mind we will only return to economic growth once the poor and the downtrodden have been made to pay. It wasn't their fault but your economic and political instincts demand a victim and they fit the bill perfectly.

Consequently same old Tories, same old Speccyland bigotry and same old economic orthodoxy.

The poor have to pay because they deserve the financial pain and it was all their fault.

This article finally proves that Mickey Mouse has a "Trevor" Nelson watch.

Major Plonquer 1

Nice to see Fatbloke back. It's great to ignore you once again. FYI: There's nothing 'new' about Austrian economics. Methinks you Mises the point.

J H Holloway

Fat Blocker

Who set the too-low interest rates in the US and UK after 9/11? And who kept them too low for too long?

Clue: not the banks.

Who told the BoE to track inflation and then took house prices out of the inflation calculation?

Clue: not the banks

Who passed a law in the US forcing banks to loan money to people with a poor credit rating, which resulted in sub-prime mortgages being spread around the world to lower the risk on US banks?

Clue: not the banks

Why didn't Australia and India have a recession?

Clue: They also have banks.

The money evaporated when the utterly massive US property bubble burst. That's were it went.

A typical US house cost 225k at the top of the market and when the 'owner' walked away from the mortgage (which many can) the bank had it left on their books at just 75K (a real example).

Times that 150k loss by millions and millions of houses in the US, and that's why many banks had no 'money' to remain upright and certainly no money to lend.

The UK's economy was being driven by too-low rates (rigged by G Brown esq), causing a housing boom and massive, massive equity withdrawal which, in turn, drove government income via stamp duty and VAT on consumer purchases and so on.

Blame the too-low interest rates and phantom inflation calculations. The banks do not set government policy, set interest rates or print money.

Glad I could help...

Tom Burroughes

Nice piece, Fraser. As the Austrians point out, it was cheap credit that got us into this mess, so more cheap credit will only defer the problem.

We certainly do need a real intellectual shift in policymaking. Your recent point about the dangers of the Bank of England's inflation target was a case in point.

oldtimer

You say: "It’s not often we do a post based on a think-tank talk – we may do more, if CoffeeHousers find them useful."

It would be a good idea for you to do this if or when it indicates a shift or development in thinking which will or could influence the future actions of the political class. It would then offer the chance to us, the unwashed, to comment before the event instead of afterwards.

On the subject of Germany, IIRC, the DM started to appreciate after c1970 when $ gold convertibility was abandoned and reinforced c1975/6 with the arrival of floating FX rates. Revaluation certainly helped Germany cope with the inflationary world of the 1970s - unlike the UK.

No doubt the horrors of the 1970s influenced UK policy makers to make inflation targetting a primary aim. But in the process, and certainly in the past 10-15 years, they lost sight of or ignored the other problem of excessive borrowing. Some people pointed it out at the time; some banks even spotted the problem eg HSBC. But even they made a costly excursion into the US sub prime finance market before owning up and extricating themselves before most other banks.

PayDirt

One reason why interest rates are low is so that “our” Banks can recapitalise by charging their borrowers high rate and giving their lenders next to nothing in return. The Banks run the world economy, not the Govt. Worse, the World is dominated by the US Dollar. Some would like a return to Gold Standard, but that’s passé. The Chinese talk about a basket of currencies as a new Reserve. How about a new Reserve created by the G20 or some such, possibly to be called the Glob. Traded in exchange for local currencies which find their own level in free markets. The Glob could be based on the monthly average of four equal parts: basket of 5 top metals (priced in aggregate of top five currencies), average cost of energy in KiloWatt-hours, basket of say 5 top foodstuffs (rice, wheat, etc) and finally average of some other important global store of value, say fish (But NOT carbon tax idiocy). The Glob would be free of inflation, one Glob would always buy the same amount of basic stuff. But would depend on the G20 organisation. My contribution to the Spectator think-tank.

Steve Tierney

>>OK So we should raise interest rates
Why will that not give us the doudle dip we fear?<<

It may well. You're missing the point. All the present policies are doing is delaying - and exacerbating - the inevitable.

If you lose your job and cant find another - you can use your credit cards to finance your lifestyle for a little while. But when you reach all your limits then you're still unemployed and skint - but you've got all these massive credit card debts too.

denis cooper

oldtimer, the concept of setting interest rates to meet a target for domestic inflation came in during the late 1980's and early 1990's:

http://en.wikipedia.org/wiki/Inflation_targeting

New Zealand was "the pioneer" in 1989, at a time when the UK was still targeting the external exchange rate of sterling.

In the aftermath of the ERM fiasco, September 1992, Lamont quickly moved over to targeting inflation instead and that was finally put on a statutory basis through the Bank of England Act 1998.

It is interesting, to say the least, that the wording of Section 11 of that Act was similar to that in the part of the Maastricht Treaty which defined the objectives of the European Central Bank.

Section 11:

"In relation to monetary policy, the objectives of the Bank of England shall be -

(a) to maintain price stability, and

(b) subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment."

Article 282.2 TFEU, as it is now:

"The ESCB shall be governed by the decision-making bodies of the European Central Bank. The primary objective of the ESCB shall be to maintain price stability. Without prejudice to that objective, it shall support the general economic policies in the Union in order to contribute to the achievement of the latter’s objectives."

michael

Houses became trendy, the 'easy money' bandwagon of fashion trading rolled into overdrive. As always when the bubble bursts, the 'added value' turns into duff clearance stock.... That no one wants to buy.

Fatbloke on tour

Bunsen Burner @ 6.04

Thank heavens you don't make your money out of the teaching of economics.

Usual GIB'by / DT / dog boiling laundry list of supposed issues that show that it was all the governments fault and not a bunch of greedy casino bankers playing fast and loose with the public's money.

To answers your questions:

1) US interest rates were the issue and "Dubya" needed an economic bounce to get elected not re-elected in 2004.

2) House prices were never part of the inflation figure.

3) Who labeled all the low income mortgages as "AAA" and sold them to an unsuspecting world? The banks on the inside track that who, the US economic establishement did not complain as it was all they had to sell and "Dubya" got his popularity bounce based on an economic uplift from borrowed money.

4) Australia is selling itself to the world one ton at a time. Raw material economy serving Asian growth. India is a developing economy poncing of the developed world using cheap English speaking labour as its main weapon. Its economic crisis will come in time.

5) US property bubble, see Item 3 and the culpability of the banks flogging criminally irresponsible financial products to a market that they knew couldn't afford to make its payment once the inducements and the teaser rates were withdrawn.

Capitalism at its finest, at its most raw, capitalism that caused the Credit Crunch.

6) What property inflation?
We have had 4 years of prices falling in the UK and with the ConDems slash and burn economics it is set to continue.

Also pray tell when rates in the UK were too low, and if thyey were too low who set them?

The only occasion they were too low in the last 15 years was the Ken + Eddy show in 96/97 where the EG at the BoE asked for rates to be raised to ward off a bout of higher inflation and KC refused for nakedly political reasons.

As always it was the Labour Party that had to sort out that particular mess.

So thanks for your help, it just showed up the hollowness of the prevaling Speccyland right wing orthodoxy.

Credit Crunch = Worst financial event in 135 years for the banks.
AD / GB had a plan to get us out of this recession, got the growth back and started to lower unemployment.

Dave the Rave and Sniffy along with all the other ConDem dog boilers want to slash and burn for political reasons, get the state back to 1905 and all this talk about Austrian economics is about the solution they offer not about their analysis of the problem.

Both are wrong but only their solution of doing nothing ties in with the dog boiling agenda of the Tory led government / ConDem coalition.

Simon Stephenson

"We should not ask what pricked the bubble, but what inflated it in the first place. The Austrian school is, for me anyway, one way of looking at this very important question"

Another way is to consider the contents of Philip Aldrick's article in the Telegraph last weekend.

http://www.telegraph.co.uk/finance/economics/8246501/Bold-reform-needed-if-capitalisms-heart-to-beat-more-strongly.html

The idea that many of the financially successful in recent years have been appropriators rather than creators provides a powerful explanation of why "capitalism" has seemed to fail - not because it is inherently faulty, but because it has been being gamed rather than followed for the last 20 years or so.

Naomi Muse

An interesting perspective, Fraser, and some excellent comments too.

There is something more systemic in how economics, businesses and other human activites work, which is very much akin to how heat and energy work too.

Before you glaze over it is a simple analogy that when you put a jug of water into the microwave all the molecules moving about create energy and that produces heat = hot water.

The same applies when a new business is set up. There is a lot of activity which creates energy which is attractive to others and generates business so that the business grows. (Simplistic but basically sound.)

These meagre examples give light to the focus of activity and if one of the main bad apples blamed for the crash was inappropriately large mortgages sold to inappropriately waged people.

When the selling got going, the 'me too' factor came into play, not only with other people who wanted to own their own house, but with mortgage lenders and insurance companies who wanted to profit by it. The amount of energy generated attracted yet more people and the risky mortgages were packaged up in financial instruments consisting of three layers of risk, solid, not quite so solid and risky - a bit like a cake covered with marzipan and then icing. The icing was meant to be the only really risky element.

As the 'me too' frenzy took over with banks buying CDS the demand became greater than the supply, which made the demand even greater. The latter packages of CDS were made up of three layers again but only the icing was solid, the cake and the marzipan were risky as could be.

So the bubble was created by energy, created by perception, created by activity and had to go pop.

Economists talk about economies becoming overheated, and use that same energy producing analogy. Energy is attractive and so even with the most logical people and the strongest will in the world, economies around the world will keep doing precisely the same thing.

donald fraser

Bricky, Clicky and Nuclear Growth

In considering the roots of the 2008 crisis remember the dotcom bubble crash over 2000 and 2001 scared many small equity investors into thinking bricks and mortar a much safer investment than shares. "It pays to be bricky and clicky" (an e-commerce slogan) took up despite the rise of Facebook etc. One truth we are waiting to still discover is that many of the Internet reforms needed post the crash of 2000/2001 are behind the crash of 2008. Of course it is difficult to pick-out what types of reform are required because Internet technology has evolved rapidly between 2000 and 2010. Facebook, Youtube and others are testament to it. Yet many of the UK's small shareholders (propelled into share ownership during the 1980s privatisation period) avoid Internet shares, a reluctance traced back to the dotcom crash. At the simplest level there is no rhyme or reason why we have .com and not .abc. TLD (Top Level Domain) reformation was proposed at times over the last decade without much success. Bright young things may understand the evolution of Internet nomenclatures with pride but Aunty Doris does not. Until such a time she can invest in Internet shares with confidence, the "new economy" or Internet economy will continue to scare her enough to keep property prices artificially high.

Successful regulatory steps of the Internet can provide new confidence and cut economic waste and inefficiencies (email spam, virus and fraud). The 2003-08 property bubble created massive expansion in "private equity" companies, which in turn funded the growth of Internet companies during this same period. So failure to introduce reforms in 2000/2001 did not stop Internet growth, but rather than we have millions of Aunty Doris's involved (wide share ownership) it is a closed "old school tie" network (i.e. Facebook.)

The truth is there is very little reform of the banking sector really needed. The obvious lesson was the one learnt back in 1929. Do not to let complex financial dealings over-run the legitimate check of a lending multiplier - the bank deposit against loans ratio. The truth is the crash of 2008 is not about banking or property at all. It is a hang-over from the dotcom crash, the failure to regulate and an intervening war to provide a temporary but unsustainable economic stimulus. It should be obvious to anyone looking back at 2008 and onwards from a decade in the future. As 1929 was about "Wall Street" (a new phenomena), so too was 2008 about "The Internet". So the true reform awaited is about the Internet. Bright young things could come up with dozens! Yet the baseline is a global rating system enforced at a local level by who controls after the dot. In our case .uk. This is beyond the scope of discussion here. However while the @ remains a circle around an "a" rather than a "p" (try the commonsense test of speaking your email address aloud, pronouncing p for the @) we still have thousands of days to go before the return of prosperous times. A small point but your keyboard is a daily testament to our need to think a little bigger about what future we will accept for ourselves.

The closing comment by Fraser Nelson that “an intellectual error might be at the root of the crash” is a difficult one to deal with in an objective manner for the outcast intellectual. In string physics, the traditional effort to distinguish between subjectivity and objectivity needs largely put to one side. Each outcast will have their own: “exceptional” macro-economic theories; “unique” educational background; “revelatory” history of failures and “knowledge” of the publishing process. My reply to Fraser Nelson is thus to repeat my argument the root of the current crash is the dotcom bubble crash of 2000-2001 and that it comes from much personal and hence subjective evidence.

First I would like to make some very subjective statements to provide some context. I expressed support of 2003’s Invasion of Iraq while simultaneously declaring my conviction no weapons of mass destruction would be found because of a series of logical deductions too complicated to explain here. I stated such war was inevitable as a macro-economic stimulus was required for the global economy and I saw little sign of the better alternative model being understood by intellectuals or politicians in the press. I say “understood” because my understanding of the new economic reforms required at the time were conceived by reading specific, obscure papers (sourced from the British Library DSC). My conclusions are as ready now as they were back in the dotcom bubble crash. However, I still lack the “means of production” to publish my economic theories, today. It is because “means” is not just about a failure to embrace the variety of publishing technologies available (to the contrary I would regard myself as an expert in electronic publishing going back to 1992). It is rather my unique background and history of failures that disable me from publishing my economic theories.

I can summarise my unique failure as such: in 1989, I lost the future political right to speak for the Conservatives because of my dissolute lifestyle and it may have lead to the Medellin cartel bombing of Pan Am Flight 103 (Lockerbie). Whether or not Lord Fraser, my uncle, was correct in accepting evidence of Libyan involvement will never be known. However what is known is that from this date onward I was ostracised, my uncle was emboldened (as Scottish Lord advocate) and my father’s birthright “as the eldest” tarnished somewhat by his own prodigy, myself, exhibiting insanity. It is hard not to feel unwittingly complicit in the decline of Scottish Conservatism in general.

Should this matter to you? Should my subjective viewpoint on the world impact your objective understanding of the roots of the 2008 crisis? Not in the long term. My own theories back then were only a mix of research and inspiration that others will eventually discover and print. With time, true solutions to the present crisis with proper reference to the earlier crisis of 2000-2001, will be written and published by others. The downside is the present crisis is the smaller cousin of a much bigger problem: how to progress safely in the age of nuclear weapons? It is into this fox-hole that I feel comfortable to retreat because despite my best theoretical efforts, I see no alternative path but to a final smart war in space between Americans and Chinese SDI shields. Clearly not built yet!

This is because my revised Project Orion (a variation on an atomic spaceship) can probably only be tested in an orbit largely free of commercial satellite. Tests otherwise would be too costly to insurance. The value of such tests is a start in the beginning of mankind’s steps to the stars, proposed at beyond light speeds. Subsequently, in causing a “scramble” for “solar systems, only this will diffuse this nuclear powder keg on earth a “cold war” leaves behind today. Although NASA is hostile to all suggested form of “substantial” nuclear propulsion, their statements have recognised the usefulness of the EPPP (External Pulsed Plasma Propulsion) in turning swords to ploughshares. Most optimistically a scramble would lead to the dismantling of hydrogen bombs (to get to the A bomb core within) and the future fabrication of the hydrogen bomb declared something akin to a “crime against humanity”.

In stating a light-speed barrier is breakable, the existence of a secondary theory of relativity (accelerative) is proposed. Journey times in days rather than decades are not only possible because of accelerative relativity but required for beneficial effects of a scramble to be realized. Therefore a secondary reply to your question Fraser Nelson on “intellectual error” and “the root of the crisis” is your analysis should also think to extend to move beyond the business cycle (or even so-called “Marxist crisis”). Look at the small risk inherent in the bigger picture the nuclear age offers mankind.

Mutually Assured Destruction (MAD) continues to exist (along with “boom” and “bust”) and will do so long after you, Fraser Nelson, have retired and forgotten what your day job was. This will be true except in two situations: it has happened (in which case your retirement is irrelevant) or other solar systems have been colonised. It is only out of some vague “love of humanity” and a dry amusement at Kafka’s feeble actions to do likewise that I refrain from deleting everything. That is because it is so difficult to distinguish between subjectivity and objectivity when inventing new ideas, models and inventions. What about the moral danger of proposing something as “likely” (but not desirable)? Is the hope of providing a warning to prepare but instead precipitating the actual event itself sufficient justification? MAD may seem a part of forgotten history but it is extremely likely part of the solution (although not exactly the root you are asking for) of the present crisis will be Chinese military expansion into a proto-SDI shield as a means to raise GDP.

My current solution to my dilemma (in keeping with my church minister’s 2001 call to be “not ashamed”) is to call for a new movement “Christians Against Nuclear Secrets”. Everything you know as an educated man should be questioned at some level because you already know that you don’t know something tagged as the “nuclear secret”. I myself suspect I know it because of my “star jump” theorising and the way the solutions revealed themselves by the study of comparative histories, in which I was trained. If I am correct, such secrets have generated enormous market distortions, particularly in hostility to nuclear power with enormous ramifications as regards the economic importance of oil over several decades and revenue flows.

Of course such secrets are also partially protecting us from terrorists but the issue of proportionality arises. During the cold war, a single terrorist nuclear attack just destroying one city could have triggered World War III. Under such conditions any “we know best” justification for these secrets is much more obvious. However these conditions no longer apply. The justification is diminished to “just one city” destroyed is horrible enough. However what about the cost side of such secrecy? Under the change of conditions, such continued secrecy is likely to lead to a future resurgence of MAD because it impedes both the general population and scientific community’s ability to come up with better long-term solution. That is to say world governments however well-meaning in continuing to “protect us” with “nuclear secrets” are now risking the very opposite. They now “protect us” from terrorists potentially “just” destroying a few cities but not as during the cold war from such an action as likely to cause World War III.

Leaving beside nuclear power generation (my views are close to James Lovelock’s “A Final Warning” – that it makes a good stop-gap measure) it is clearly difficult to argue clearly why the nuclear secret held since WWII should be dropped. For that reason Christians might prefer to argue no one has the true authority over a God-made universe to hide the truth of its very composition by secrecy, no matter the good intentions. As I scientist I cannot see how the required intellectual challenges to either Einstein’s theory of relativity (e.g. a secondary “accelerative” one as I propose) or successful revisions to the Project Orion atomic spaceship (1957-65) can be proposed successfully by “bright young things” in such a climate. In this context, advocating a new economic model (say neo-Keynesianism largely written around the reformation of the Internet) is secondary. A new up-wave may begin and last a significant amount of time but at the end of the road remains the much bigger problem: how to progress safely in the age of nuclear weapons. Unless this can also be tackled at the same time, I am not sure that you, neither Fraser Nelson, nor I (aged 42 in a matter of days) can reasonably expect to enjoy a retirement into the 80’s. My retirement might well be vaporised away from me. So I ask you Fraser Nelson to join with me in CANS (Christians Against Nuclear Secrets) today because whatever we lose today will be repaid many time in the future we can create.

Kris M

#4 is absolutley not true. Matt Taibbi's 'Griftopia' clearly lays out how Goldman Sachs and other special interests profited from the tailor-fitted policies during the bubble years (see: oil/commodity run up, summer 2008). Now if you'd like to press on and clarify the corporatism vs capitalism arguement that may be another issue...

denis cooper

Mervyn King speech on the potential risks of changing the inflation target from one expressed in terms of RPI-X to one expressed in terms of CPI, January 2004:

http://www.bankofengland.co.uk/publications/speeches/2004/speech211.pdf

"From May 1997 the target was 2½% for RPIX inflation. But in December the Chancellor gave the Monetary Policy Committee a new target for inflation. It is 2% as measured by the Consumer Prices Index or CPI, formerly known as the Harmonised Index of Consumer Prices."

"In this respect, the difference between RPIX and CPI inflation as a measure of the economic temperature of the economy is rather like the difference between Fahrenheit and Centigrade as a measure of physical temperature. In both cases moving from one measure to another changes the number without there having been any change in the temperature itself."

"Unfortunately, there is an additional complication. Unlike the translation between Fahrenheit and Centigrade, the difference between RPIX and CPI inflation does vary with the economic temperature. That is because the "formula" effect is not the only difference between the two measures. RPIX includes both house prices and Council Tax. Those items are omitted from the basket of goods and services used to construct the CPI."

"Of greater significance than the average difference between the two measures in the long run is the observation that the gap between them varies over time, often quite widely, in line with changes in the temperature of the economy in general and house prices in particular."

yank

LargeFellow,

Much as you will both resist it, you and the dogboiling Trevor are serving up the same dish, albeit Trevor now seems to have whimsy for a side of Austrian horseradish, a taste far to stout for you both.

I'm still chuckling at the lefty Spectator's wistful musings re Hayek. It's redolent of a streetwalker dousing with perfume.

The chasm separating you from liberal thought is as gaping as the one separating you from conservative thought, friends. You can tussle within the bubble exclusively, or you can be relevant, but you can't do both.

Fatbloke on tour

plank @ 2.14

It would be interesting to how you see the current situation playing out, what started it, how it can be fixed and hat should be done to stop it from happening again?

To be classed as being on the same side as "Trevor" and the rest of the Speccyland dog boiling GIB'bies is a first I would rather not have had.

As always spread the wealth when it comes to info and opinions.

Hopefully it will be closer to reality than your Wehrmacht loving wet dreams on the performance of the Red Army in the second half of WW2.

Any thoughts on the growth of China and the current situation in the US would be interesting.

yank

OverConsumed One,

My analysis is pretty standard and dully embraces the obvious, and is thus apart from yours and your buddy Trevor's, which embrace ultimately like agendas and are thus far more complex. I think folks in this string have it all pretty much covered. You and Trev would have to shed much of your eye scales in order to see it, though. But read it through again.

Alex

@Yank

You do know that the Spectator is THE UK Conservative Magazine. Leftist it is not one jot. If you came from Coordination Problem(and that is the source of your confustion)then you will notice that Steve Horwitz has ammended his post.

yank

Well no, I hadn't used that site in determining the Spectator's leftist bent, but thank you for pointing it out! Quite amusing, that Mr. Horwitz and I came to the same conclusion re the Spectator, before Trevor or mates rushed over to provide "correction".

But let's not bore ourselves toasting days of yon, particularly since I never participated in that yon, and know only today. This publication is leftist. It is not conservative, and it is not liberal, and it is certainly not libertarian, much as some here attempt to tart up as such via Hayek. That fatal conceit would require a fair bit more than perfume.

And the day the Spectator disavows its cheerleading for the redistributionist policy promoted by its pet coalition, one amongst its multiple other leftist idiosyncrasies, perhaps we can reassess matters.

The view from inside the bubble counts little in all this, Alex.

Rory Sutherland (Wiki Man)

I have been interested in the Austrian school for the past year, though from the microeconomic perspective. I had become fascinated by von Mises and his ideas on praxeology, which seemed to be the forerunner of Behavioural Economics, Nudge theory, etc. So I asked around to see whether there any "Austrian" academics in Britain who might help me get my head around On Human Action. I was eventually told there are a grand total of.... two.

Whatever your views, this is not nearly enough. Anything that might kindle a little interest in this can't hurt. Could the von Mises Institute open a London chapter?

Barry Bilge

"Blame artificially low interest rates. "

Low central bank rates bare little relationship to the rates the public 'enjoy' except when it comes to savings. So it is for banks to set the rates they charge customers according to the risk. Central bank rates *shouldn't* come into it and at the height of the mania didn't come into it - banks were getting their funding from the money markets and at LIBOR rates which were at the time lower than BoE rates by a couple of percentage points IIRC.

Central bank rates are not a panacea and are only one indicator in the economy. Banks appear to me to have wrongly assumed that the ECB would manage their debt bubbles for them, when in fact the BoE was never going to do such a thing. Responsibility for bad lending at cheap rates rests with those banks. It is the same with the Eurozone - the central bank cannot possibly set rates to accommodate all the diverging and converging needs for borrowing and saving across the continent - it returns or requires greater responsibility from the banks to price their lending according to the risk in front of them.

Across the globe almost, the regulatory systems introduced 10-15 years ago either convinced banks they no longer needed to do this or failed to remind banks they needed to do this.

Robert Christopher

In the road traffic example given in the article, the bankers' motivation could be the car occupants' desire to arrive at their destination. Is that worthy of guilt?
If no one wanted to go and 'see Aunty Mildred' on a Sunday afternoon, then Sunday afternoons would be accident free.

To have someone walking in front of each car, carrying a red flag, would also do the trick. :)

In order to have any idea how to improve the situation, the cause of the boom and bust should be a 'what', not a 'who'. A 'who' ends in a guilty party being blamed, but no process that could be amended.

It could be a trick question though. Many years ago I was told 'bankers don't manage money, they manage risk'. Therefore when interest rates are very low and someone(?) in authority states 'no boom and bust', removing risk from the mix, managing the economy, or even a company, is made very difficult.
It would be safer to slow down and reduce risk elsewhere in the business, but it might mean being gobbled up by a bigger company taking bigger 'risks' and, perhaps, taking a few chances.

Robert Christopher

yank "Quite amusing, that this leftist publication, the Spectator, is now brazen enough to drape itself in Hayek."

Wikipedia "The Spectator: It generally takes a right-of-centre, conservative editorial line, although regular contributors such as Frank Field and Martin Bright write from a more left-wing perspective."

I think that Wikipedia has a better description; and I could add Rod Liddle to their list.

Simon Stephenson

Barry Bilge : 10.34am

I think you should bear in mind the possibility that the political policymakers of the last 15-20 years have not so much opened up the short-term attractiveness of imprudence and irresponsibility as to have forced it upon a financial sector that was largely unwilling. Could it be that concerted political action in both the US and the UK has created the imperative that the immediate and the ultra-short term are the only things that matter in profit declaration, and that organisations that fail to adapt to this imperative will be at such a competitive disadvantage that they will not survive?

This is not to say that the financial sector has not itself influenced the development of policy, but that perhaps its direction has been set more by the impressions of the marketing-men than by the cold realities of the financial professionals.

There's far too little credence given to the thought that in a world where dishonesty reigns, it's ridiculous to expect even basically honest people to do other than follow the trend.

Simon Stephenson

Robert Christopher : 12.09pm

"In order to have any idea how to improve the situation, the cause of the boom and bust should be a 'what', not a 'who'."

Good idea, but how do you get this across to the tabloid-munching masses to whom the blaming of someone else is the solitary purpose of the investigation of failures? Regrettably, the way that it is, the mainstream is never going to accept that it, itself, is the principal reason for the turgid mediocrity of political decision-making in which we live.

yank

Mr. Christopher,

The view from inside the bubble matters little, nor does a Wikipedia entry, unless you find yourself one who values such.

Again, when the Spectator disavows its multiple leftist positions, repeatedly pushed on these pages, we can reassess matters. 'til then, it is to be considered of the Left. Not conservative. Not liberal, and certainly not libertarian.

And since it hasn't chosen to support its cheerleading for redistributionism, perhaps the Spectator would care to discuss its support for overall budget stasis accompanied by QE and the inevitable inflation.

Or perhaps a photograph of Hayek covers all? Well, that and some mindless gibberish about non-existent "cuts".

nemesis

Im only half way through my Von Mises primer (surprisingly, sent to me by my MEP). But as I understand it the business cycle is created by government when they expand cretit. I personally think that our present troubles stem back to Bretton Woods in the 70s. It seems fiat currency is backed by confidence alone and once the confidence evaporates your paper money is just paper.
I am glad the Austian school is becoming wider known. It makes alot of sense to me.
Alot of my socialist acquaintences seem to believe there is a money tree orchard at the back of No. 10 !

Simon Stephenson

nemesis : 6.08pm

The Bretton Woods Agreement was signed in 1944. The USA terminated convertibility of the dollar to gold in 1971 - this could be said to be the end of Bretton Woods,

Socialists need to believe in money-tree orchards because the limitations demanded of sound money are too restrictive for their ambitions. This is also why they've spent the last half-century seeking to create a society which believes in the superiority of make-believe over reality - to the great detriment of the lives of us all.

nemesis

Thank you Simon for the clarification. Like I said - Im still on a learning curve.

James Murphy

Fat Bloke on Tour - please don't publish your venues or dates.

Neil McEvoy

Have parties publish in their election manifestos, their intended yearly tax take, in cash terms, over a five-year term; an outcome, in any year, more than 2% above plan to trigger a rebate or an immediate election. Would act to limit and fiscal and monetary profligacy at one go.

Public Spectacle Observor

@ Mark (who accepts Austrian diagnosis/ prevention, yet still subscribes to Keynesian-Monetarist "solutions")

Mark, I'm not sure what you see as a "solution" (in any meaningful sense of the word) when you say Keynesian and Monetarist theory provides better "solutions" when there is an economic bust...

Keynesianism suffers from being incapable of proving that on NET BALANCE, Government spending is PRODUCTIVE for the economy. (On net balance, is government spending guided by the economic profit-motive? -OR- Is government spending guided by the political profit-motive? e.g. vote-buying, welfarism, warfarism, etc.)

Keynesianism also fails to incorporate the Wicksellian natural rate of interest into its framework to even derive a conclusion on the capital structure and resource constraints of an economy. If Keynesian's don't understand those two BASIC things, why would you subscribe to their so-called "solutions?"

While Monetarism is slightly better than Keynesianism, it still suffers from a similar short-coming as Keynesianism does. Monetarists embrace the logical implications of deviation from the Wicksellian natural rate of interest in regards to labor markets, but for some odd reason they fail to apply it to loan markets. Not having a capital theory, Monetarists don't care all that much if the Fed pushes interest rates down (or up) so long as inflation stays in check. Of course, I'll agree to Monetarist tax-cuts, with corresponding cuts in government spending, but a tax cut without a spending cut amounts to no cut at all.

In sum, both Keynesians and Monetarists fail to understand capital structure or resource constraints in an economy, and because of this, they reach unsound conclusions. Mark, now that you know the short-comings of Keynesianism and Monetarism, do you still find it acceptable, even coherent, to embrace the so-called "solutions" of at least Keynesians if not Monetarists?

Fatbloke on tour

One club golfer @ 6.36

Away and bile yer heid ya numpty.

Another economic lightweight trying to understand a complex system based on reading one chapter of one book by one economist.

Another tale of dog boiling with the reason for the slump is that the poor have too much money.

Simplistic shite from start to finish.

PS
Add in to the mix the concept of social / societal profit - the collective provision of essential services based on need and not income levels and free at the point of delivery.