The Austrians strike back



Fraser Nelson's written a good write-up of yesterday's lunchtime event with Austrian economist Steve Horwitz, who spoke at the ASI about the "Great Recession" of 2007-09. Fraser summarizes Prof Horwitz's main points and produces a very useful 60-second guide to Austrianism and the crisis. For example:

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.

3. Blame artificially low interest rates. They may create a feel-good factor, as people fill their homes with cheap stuff. But they wrongly incentivise borrowing, causing a boom followed by a bust. Interest rates are, of course, set by central banks who don’t get it right, and actually can’t. Central banks have an incentive to inflate, to cheapen the cost of government borrowing.

As Fraser says, the lack of a coherent narrative for the crash which doesn't fall back on moralistic psychologizing (ie, blaming greedy bankers or animal spirits) is a serious problem. The Austrian economists have successfully predicted and explained the crisis within their own framework – as Prof Horwitz said, it is a necessary (though possibly not sufficient) perspective on economics.