This is the first I’ve heard of an “Austrian” advocating exercise of Fed powers.
Steve Horwitz, according to his clarification over at Coordination Problem, explains the problem of the Great Depression as one unique to an economy with a central bank. He believes that banks should increase the supply of money in order to make up for an increase in demand; he argues that since velocity decreases, because by definition an increase in demand for money equates to an increase in the intention of saving, the increase in the supply of money is not inflationary.
I have decided to read George Selgin’s The Theory of Free Banking and Horwitz’ book on Austrian microeconomics and macroeconomics, as well as finish Larry Sechrest’s Free Banking, although I am not yet bought.
Nevertheless, Horwitz agrees that the ideal case is for the abolition of the central bank; he just says absent of free banking it is the central bank which has to extend the supply of money to meet an increase in demand.
If you’re interested in reading our exchange, where he developed his thesis for me: http://www.coordinationproblem.org/2010/03/reason-letter-and-kates-volume.html#comments
Chicago economists need to stop calling themselves Austrians.
Do you mean the coordination problemists?
Jonathan, this link doesn’t work right.
http://www.coordinationproblem.org/2010/03/reason-letter-and-kates-volume.html
The lack of auto-linking annoys me. [:)]
After reading that link, I meant the Keynesians. Well, same thing.
Yeah, his usage of MV=PQ is not very strong evidence for his case. MV=PQ still ignores the problem of an increase in some prices relative to others, which is what an artificial increase in savings would do [i.e. printing money to meet for an increase in demand for money]. On the other hand, I admit that I am not completely right either, which is why I’ve decided to avoid passing judgment before I research the topic.
I spent an hour reading that over and over trying to figure out what the hell he is talking about. I think I get it now.
“Banking liabilities” is a euphemism for pyramid credit. So, people want to hold more “bank liabilities”. How do we know that? Well, everyone always wants more “bank liabilities”. Duh. So, the bank should create more bank liabilities because people want more bank liabilities. I’ll take a few bank liabilities myself, thanks.
That was the least of my concerns. The alarming thing is that every word he says essentially suggests a “market failure” scenario. In terms of reflecting the values of market participants, the Fed injecting liquidity is not at all different from the government doing the same with tax funds. Making a case about the cause of business cycles is one thing. It just happens to be an argument against AE as a whole.
Horwitz: [my emphasis and comments in bold] “Think of it this way: if people are increasing their demands to hold bank liabilities (bank money), that is the equivalent of wanting to supply more loanable funds to the banking system. [Really? How can he assume that?] Holding a bank liability is a form of saving. As such, an increase in bank liability holdings causes the natural rate to fall (c.p.) as people are more future oriented [how does he know they are future oriented, maybe they fear the present]. If the bank does not respond by supplying more funds for investment to match that new saving, it will be causing the market rate to be above the natural rate, and it is THAT that distorts the structure of production…[does he mean “if the banks don’t lend?” But what if there is no one to lend to?] If the bank responds to the new saving by creating new funds for investment, it is doing what it should do by preventing a distortion of the structure of production and ensuring that it, in fact, matches consumers’ now greater desire to save (lower TP) [emphasis added] Seeing the connection between money in the form of bank liabilities and the loanable funds market (and thus the capital structure) is the key.” [but see my comments below]
How can he assume the increased demand for money is due to decreased time preference? If I increase my demand for cash holdings, due to fear, my time preference has increased, not decreased. I value current goods more than future goods. I don’t want a lengthened structure of production. A decreased time preference implies valuing future goods more highly than current goods. So, isn’t there a distinction between increased demand for money due to falling time preference (the situation he describes), and increased demand for money due to fear?
And, in his theory, increased demand for money = decreased time preference = increased loanable funds, but the banks are (inexplicably) not lending. Why aren’t the banks lending if they have all this money that people with decreased time preferences are saving? I suggest it is because there are no credit worthy borrowers due to the crumbling structure of production caused by the earlier fiat credit expansion.
Horwitiz seems to contradict this article, as seen in another thread: Demand for Money and the Time Structure of Production
That would be a negative rate. You would pay interest to people to borrow from you.
Where he drove off the cliff above all: demand = want. Demand /= want. Which is what I was joking about.
I’m refering to subjective value scales, ie, 50 of something to be received in the future is ranked higher on the subjective value scale than having 10 of something right now, the essence of time preference (nothing to do with negative interest).
It seemed like you were saying that consuming x in the future is preferable to consuming x now.
Thanks for all the good input. Sorry it took a while to get back on this, but I was out of the country on break last week. I will take all of this into consideration when continuing my research.