My understanding was that, in Austrian theory, there were no boom-and-bust cycles without a central bank. At least none that were as drastic as with a central bank. I may be confused about this entire thing. I just saw Wall Street: Money Never Sleeps, and Gordon Gekko brought up Tulipomania, so I figured I’d ask that question.
Are boom-and-bust cycles good if they are not drastic, or would there be none without a central bank? If the latter, what was the case with Tulipomania?
You dont need a central bank to produce a monetary expansion, which will produce the boom-bust cycle.
You can the banking system during the last part of the XIX century in the USA. Lincoln approved the banking act that centralized credit in the big banks of New York. It was not as “powerful” as a central bank, but allowed for credit expansion, triggering the boom and bust cycle.
Doug French’s work on early speculative bubbles (including “tulipmania”) can be instructive. Beyond that book, he has produced an article specifically on that topic.
P.S. I think I’ll be too digusted by the dialogue in that movie to sit through the whole thing; how was it?
A ‘boom-bust cycle’ is caused when the natural rate and market rate of interest diverge. It happens when a central bank floods the market with credit and it also happens when there is a banking cartel. You can read more about free banking (or monetary equilibrium theory, which is what I’m basically describing) here.
It doesn’t matter, because it’s efficient either way (according to Chicagoists).
And that’s not a business cycle anyway.
Not all “Chicagoists” subscribe to that viewpoint. I’d dare say most do not.
Why not? In the absence of a central bank, markets are efficient. In the presence of a central bank, markets adjust to whatever is then efficient.
The US had many booms/busts due to government policy before the Fed. The Fed has taken things to a new level, but the idea of messing with the money supply is not new. I have a history here:
I really liked it. Some of the dialogue was cheesy, but it seemed like they actually knew what they were talking about for the most part. And it was quite pro-capitalism, too. They discuss - only for a short time - that capitalism is a profits and loss system and that it basically course-corrects, so that was good. They cast characters who look almost exactly like Paulson and Geithner, and it’s pretty cool to watch them discussing the bailout with the larger financial institution’s CEOs. I’d check it out if I were you.
Why not? In the absence of a central bank, markets are efficient. In the presence of a central bank, markets adjust to whatever is then efficient.
I think you’re just summed up quite a bit of the Austian view,