Maybe Listen To Ludvig This Time Around?
Mark Spitznagel writes in the WSJ that Ludwig von Mises was snubbed by economists when he warned of a credit crisis in the 20s...predicting the Depression. I didn't read it it in the original German -- "not exactly a beach read," writes Spitznagel. In fact, I never read it at all. But, Spitznagel makes von Mises' thinking remarkably simple to understand:

Taking his cue from David Hume and David Ricardo, Mises explained how the banking system was endowed with the singular ability to expand credit and with it the money supply, and how this was magnified by government intervention. Left alone, interest rates would adjust such that only the amount of credit would be used as is voluntarily supplied and demanded. But when credit is force-fed beyond that (call it a credit gavage), grotesque things start to happen.

Government-imposed expansion of bank credit distorts our "time preferences," or our desire for saving versus consumption. Government-imposed interest rates artificially below rates demanded by savers leads to increased borrowing and capital investment beyond what savers will provide. This causes temporarily higher employment, wages and consumption.

Ordinarily, any random spikes in credit would be quickly absorbed by the system--the pricing errors corrected, the half-baked investments liquidated, like a supple tree yielding to the wind and then returning. But when the government holds rates artificially low in order to feed ever higher capital investment in otherwise unsound, unsustainable businesses, it creates the conditions for a crash. Everyone looks smart for a while, but eventually the whole monstrosity collapses under its own weight through a credit contraction or, worse, a banking collapse.

The system is dramatically susceptible to errors, both on the policy side and on the entrepreneurial side. Government expansion of credit takes a system otherwise capable of adjustment and resilience and transforms it into one with tremendous cyclical volatility.

I just love this guy. Per Spitznagel:

Mises's solution follows logically from his warnings. You can't fix what's broken by breaking it yet again. Stop the credit gavage. Stop inflating. Don't encourage consumption, but rather encourage saving and the repayment of debt. Let all the lame businesses fail--no bailouts. (You see where I'm going with this.) The distortions must be removed or else the precipice from which the system will inevitably fall will simply grow higher and higher.

Spitznagel writes that while von Mises turned down a bank job, not wanting his name on any part of the crash, it's a pity Keynes, who lost big in the stock market crash was so dapper, and good English-writing, and so filled with such completely wrong but well-spoken ideas.

Ludvig von Mises Institute is here. And here, from a just-blogged 1964 Murray Rothbard essay, from a quote by Frank Chodorov, is where we're headed:

The state is an antisocial organization, originating in conquest and concerned only with confiscating production.... There are two ways of making a living, Nock explained. One is the economic means, the other the political means. The first consists of the application of human effort to raw materials so as to bring into being things that people want; the second is the confiscation of the rightful property of others....

The state is that group of people, who having got hold of the machinery of compulsion, legally or otherwise, use it to better their circumstances; that is the political means.

Rothbard continued:

(Albert Jay) Nock would hasten to explain that the state consists not only of politicians, but also those who make use of the politicians for their own ends; that would include those we call pressure groups, lobbyists, and all who wrangle special privileges out of the politicians. All the injustices that plague "advanced" societies, he maintained, are traceable to the workings of the state organizations that attach themselves to these societies.