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8. lecture:What to Do?

Lecturer: Ivan Mikloš | Wednesday, 1. 12. 2010

In the previous lectures of the second trimester we have explained the different perspectives on the causes of the crisis between the Austrian School and Keynesians, and in the last lecture we mentioned how the situation developed in Japan over the last twenty years and what is the perspective of both schools on this development. As we have seen, the Austrians and Keynesians have diametrically different views, however, there are certain ideas that they have in common, for example, the significance of psychological factors in the formation of bubbles. However, regarding the solutions to crises, the differences could not differ more.

So what should be done? Let us start with the Austrian School. Proposals from the perspective of this school are summarized in the book of Thomas E. Woods 'Meltdown'. The Austrians propose:

  1. Letting banks and enterprises to go bankrupt to allow markets to clean up from those entities, which are inefficient and not competitive. This is the Schumpeter's Creative Destruction, which will lead us to an introduction of a new equilibrium and healthier and higher growth. According to the Austrians, the crisis itself is not the problem; the problem is the formation and inflation of bubbles.
  2. Abolishing Fannie Mae and Freddy Mac, since these state-sponsored, and during crises being rescued by taxpayers, institutions contributed to the crisis and became a symbol of inefficiency and moral hazard.
  3. End of governmental bailouts and reduction of state spending. Problems that incurred by excessive spending and indebtedness cannot be solved by even greater spending and indebting. Woods directly mentions Paul Krugman and calls to ignore him and his advices such as that: 'Obama administration should estimate the amount needed for stimulus measures and then increase it by 50%'.
  4. Stopping state policy of money manipulation. The cost of money is not determined by market but the FED, which is a state institution that manipulates with the volume and value of money in the market, thus distorting the market environment. FED sends false signals to the economy, which then leads to imbalances and formation of bubbles and crises. Woods says that we are being repeatedly said that the laissez-faire ideology (free market) failed, but in fact failed the ideology of central planning of money supply and interest rates.
  5. Abolishing FED for the above reasons and because of the fact that the FED has set the moral hazard as being inherent to banking. Well-known investor Jim Rogers expects that the FED will be abolished within ten years. For now, FED should stop manipulating the interest rates and bailing out banks.
  6. Abolishing monopoly money as suggested by Mises and Hayek. Ludwig von Mises once said that history of money is the history of states seeking the destruction of money. If there is one monopoly privilege that should never give to the state's administration, then it is the creation and control of money. Hayek said I quote: "To put it into the hands of an institution which is protected against competition, which can force us to accept the money, which is subject to incessant political pressure, such an authority will not ever again give us good money".

So much for the Austrian School. What do the Keynesians say? Let us summarize the recommendations of Paul Krugman, George Ackerlof and Robert Schiller. Krugman and Ackerlof are Nobel Prize winners in economics from 2008 and the latter from 200, and this school clearly prevails over the Austrian School in terms of impact on the real anti-crisis policy since 2008. Obama and Bernanke proceeds in principle according to the Keynesians' recommendations, which we will summarize in the following bullets:

  1. During a crisis, Keynesians considers to be the key element to stimulate lending in order to stimulate demand. Banks should be provided with new capital to restore their ability to borrow money and to de-frost frozen credit flows.
  2. Temporarily nationalize a major part of the financial sector.
  3. Force central banks during the transition period to provide direct financial loans also to a non-financial sector.
  4. Introduce a policy of fiscal stimulus, especially in the form of increase government spending. These expenses should be increased significantly, especially for the construction of roads, bridges and other infrastructure.
  5. The new, much stronger regulation in the financial sector, particularly in the so-called shadow banking, which by the Krugman is considered to be the investment banking and in the new financial products. He argues that all that is necessary to bailout during the a financial crisis, because it is a necessary part of the financial system, should be subject to post-crisis regulation that would prevent taking too much risks
  6. To consider whether or not and how to regulate financial globalization. Krugman gives no suggestions here; however he indicates that he is rather for a regulation.

Paul Krugman, in his argumentation, does not conceal the fact his suggestions may result in new bubbles, he even proudly admits that and claims that unless, the real estate bubble is replaced by a new bubble, it is hard to expect a quick economic recovery. Krugman also quite nonchalantly reacts to the risk of repetition of the Japanese scenario, according to him, the situation in Japan would be far worse without the measures taken by the Japan's government, and he thinks that these measures would be much more effective under the circumstances present in the United States

Akerlof and Shiller, whom I already mentioned, goes even further than Krugman, they say that the main task of central banks is to provide such credit conditions to allow full employment. They argue that the role of the state, during a financial sector collapse, is to replace this financial sector essentially with the same methods, as I mentioned in case of Krugman, in order to ensure full employment

Well, we will see. The Obama administration and Fed under Bernanke goes almost exactly the same way as recommended by Keynesians. Recently announced the so-called quantitative easing, through which the Fed wants to pour additional 600 billion USD into the economy over the next eight months, clearly indicates that the government is following the Keynesian's ideology. Although, a deep crisis was avoided, but we are far from the actual recovery, not to mention the full employment. The unemployment rate in the United States reaches record levels from last decades and there is no indication of any improvement.

So we will see. In tennis terminology, we could say that Keynesians have been bageled, however, it is just the end of the first set. Keynesian's condition does not look good. More in the third trimester in the next spring. I look forward to you, thank you for your confidence and cooperation.


22 comment(s). Display all comments.

Martin Slavkovsky

Prosim Vas, kde najdem odporucanu literaturu, ktorá je spominana vo videu? Dakujem

07.03.2013 | 20:46:43
Pavol Schumichrast


Peter Dian Vám dal odpoveď. Kým bude týmto bankám/rodinám vyhovovať keynesiánske učenie, bude presadzované ako vo vláde tak aj na verejnosti. Na každú krajinu, ktorá by mala tendenciu odkloniť sa od tohto učenia, by sa zosypala vlna kritiky ak nie viac. Jednoducho súčasný systém neumožňuje aplikáciu učenia rakúskej školy aj keď sa môže zdať ako omnoho prirodzenejšie a “zdravé”.

16.03.2011 | 12:42:10
Zdeno Hušek

Miroslava Tekelová:
Národná banka (štát) určuje aj koľko je v obehu “digitálnych peňazí”, pomocou určovania mininimálnej povinnej rezervy a kapitálovej primeranosti bánk. Kapitálová primeranosť zjednodušenie hovorí o pomere vlastného kapitálu ku požičaným peniazom. Minimálne rezervy zas o tom koľko peňazí musí mať banka uložených v NBS.

08.03.2011 | 16:14:15
Peter Dian

Výraz monopolné peniaze som našiel v knihe “Konspirace bohatych a mocnych” od R.T.Kiyosakiho, pravidlo z hry Monopoly: “Banka nikdy nekrachuje. Ak nemá banka peniaze, môže ich vydať toľko, koľko je potrebné; stačí ich nakresliť na kus papiera”; Tiež skvele opisuje FED: Federálna rezerva, nie je ani americká, ani federálna a nemá žiadne rezervy. Je to bankový kartel niekoľkých najbohatších rodín sveta, podobne ako napr. OPEC.

20.02.2011 | 22:12:19
Lenka Bodnárová

Mna by tiež zaujímalo, či a kde sa reálne uplatnili myšlienky rakúskej školy, ako to dopadlo atď. Prípadne môže byť SR prvá krajina? smile

31.01.2011 | 14:23:21