Hey guys, a couple of days ago I was out to dinner with a friend of mine. He is probably one of the most persuasive and likable people I have ever met. He is a smart guy, and I can tell he has so much potential to be a great austrian, but he will not budge on a few things, most importantly are the bailouts. He gave me his side, saying that the bailouts were a necessary evil. He agrees it was the government who put us into the situation in the first place. I told him the economy is like a heroin addict. The depressions and recessions are the detox’s of coming off the heroin (cheap credit and money), and when you bail out these banks, you are simply giving the addict more heroin and temporarily alleviating the pain. This will eventually kill the addict, as his body cannot maintain this lifestyle forever. The death of the addict is the hyperinflation and ruination of the economy and the complete devaluation of the money. He basically said I may be partly correct, but he viewed out economy this way. The detox will kill the heroin addict. Better to give him more heroin now and let him die in bliss from an overdose, than to let him die now in utter pain and suffering. His exact words -“if we hadnt of bailed out the banks we wouldn’t have ‘lasted the winter’. Everyone would have woken up with their bank accounts gone. Almost no one would have had any money and the economy would have been irreparable” He then proceeded to say some nonsense about how China would then have gotten ahead of us and then somehow controlled the world. I told him I did not understand why we always have to be in first place, if being in second place is better than crippling ourselves as well as everyone else so we can stay in first.
What specific evidence do we have that this would not be the case (that our economy would not have been irreparable). He understand in theory that I am right, but that in our reality, it wouldn’t work that way. We would be vulnerable and “would not last the winter.”
Well. First of all, it’s not on you to prove him wrong. He’s the one advocating intervention and the initiation of force. He’s the one advocating something. The onus is on him to prove his assertion…or at least support it…which he hasn’t even done that.
You’ll notice this is a common tactic of people touting nonsense. They have no way to back up anything they say, because
they’re largely ignorant
their theory is based almost entirely on fallacy
So you’ll find they have nothing to offer other than bare assertions. And if they’re smart, they’ll be sure to spout these assertions as if they are common fact. This is how people like Bill Maher gain a following. They simply repeat the nonsense people would like to believe, but with a tone of authority that reassures people that they’re right because obviously this guy is smart, and he is presenting these claims as if they are obvious.
And then when you question them on this, they attempt to flip the burden of proof on you…essentially making a ton of claims and then insisting it’s on you to prove them wrong. See “argument from ignorance” and “burden of proof”. (For more on people like Maher, see here).
But if you’d like some support for the Austrian side, see here, and here. (Those are geared more as explanations of how things came about, but the resources provided also help explain why the proper course of action is the proper one.)
The common example brought up against “without the bailouts the Earth would have spun off its axis and tumbled towards the sun”, as Tom Woods puts it, is The Depression of 1920:
The crux of the Austrian conception of recovery from a Depression is the adjustment of relative prices. Since the prices of capital goods fall further in a depression than consumption goods the market process will eventually arrive at a level that finds capitalists and entrepreneurs again able to profitably deploy capital. It is the margin, the expected difference between the input costs and product sale price, that determines whether or not entrepreneurs engage in production after all. Allowing the market process to work would create new opportunities to profit.
Might there be reduced demand for these new goods and services due to lower wage rates etc.? More than likely I’d say, but temporarily, because the profit opportunities created by the price adjustment of capital v. consumer goods also makes labour more appealing (assuming you let the market set the price). Furthermore, deflation would increase the purchasing power of the unit of account, easing the burden on consumers even further.
I also think that the reduction of leverage in the economy would lay the foundation for new, robust growth. The way I see it, if the government at least maintained the credibility of the US dollar AND the rule of law in a deflationary depression there would still be social upheaval but the people in possession of real, productive capital would be in an incredible position to take advantage of massively lower prices. Cold, hard cash would be King (regardless of if you denominate it in gold or US Dollars) because credit would be massively restricted relative to the previous state of affairs.
To reiterate: The ability of capitalists/entrepreneurs to take advantage of relative price adjustments between capital and consumer goods during a depression would 1) slow and eventually arrest the contraction on the economy, and 2) lay the foundation for real growth.
In the freeman article, the author claims the Fed bumped up interest rates which put a choke hold on insolvent banks, then woods says the Fed did nothing back in the 20’s. I understand that both today and probably then we want higher interest rates to counteract the artificially low interest rates instilled by the Fed. But even if the Fed raises the interest rates, this is still market intervention and cannot be as helpful as allowing the free market to set the rates. Whats up? DId or did not the Fed do ANY KIND OF INTERVENTION during the depression of the 20’s? And, if they did, then the opposition could make a case that it was the Fed that saved us in the 20’s, albeit a Fed with a totally different monetary policy (artificially raising interest rates instead of lowering them).
In the freeman article, the author claims the Fed bumped up interest rates which put a choke hold on insolvent banks, then woods says the Fed did nothing back in the 20’s.
Nonsense.
Woods: “The federal government did not do what Keynesian economists ever since have urged it to do: run unbalanced budgets and prime the pump through increased expenditures. Rather, there prevailed the old-fashioned view that government should keep taxation and spending low and reduce the public debt.”
What Woods did say is that the federal government did not employ “any of the macroeconomic tools — public works spending, government deficits, and inflationary monetary policy — that conventional wisdom now recommends as the solution to economic slowdowns.” But he most certainly did not say the government did nothing.
But even if the Fed raises the interest rates, this is still market intervention and cannot be as helpful as allowing the free market to set the rates.
It is not intervention in the respect that the desired interest rate level by the market was consistently higher than the Fed interest rate when the crisis began. The Fed raising their interest rate effectively freed the market to raise interest rates to their desired levels. In short, the increase in the interest rate was the government getting out of the way (without relinquishing control, of course).
Oh, so the Fed essentially made borrowing from them so expensive for the banks, that the ones that needed the money went under, while the others who had the ability to pay the rate, or didn’t need to borrow could then set higher interest rates? If so, then the banks that had to borrow would have to set their rates perhaps higher than the market would have set them, leading to an artificial boom in consumer goods, right?
According to the freeman, the Fed raise its discount rate to a record high 7% by June of 1920. So no, this was not at the end of the depression of 20-21
