Just how clueless are mainstream economists about what caused the financial crisis?

A new article at DollarCollapse.com makes it painfully clear that mainstream Keynesian economists had absolutely no clue as to what the causes of the financial and economic collapse of the economy were, and failed miserably to predict even a slight problem leading up to the crisis.

This of course is not news to those of us who have followed the Austrian School of economics.  Many Austrians, including Ron Paul and Peter Schiff of Euro Pacific Capital (who formed a lucrative investment product to short the market for his clients), were predicting the collapse of the housing market bubble years before it happened.

One of the problems for Keynesians is that they see everything in aggregates and assume that if aggregate numbers are all rising, everything is going along just fine.  They see capital as being some big homogenous blob whereas Austrians correctly understand that capital is heterogeneous and it makes a difference what the capital structure is and how money flows in the economy.

Austrians use their insights to predict the results of monetary intervention in the economy by the central bank.  When the Federal Reserve inflates the money has to flow somewhere and it will create a bubble in some sector of the economy such as the housing market and now the stock market, as we witness all time record highs in the Dow Jones.  This insight is part of what is known as Austrian Business Cycle Theory.

The problem is that Austrians don’t see a role for the government in the economy and therefore are not welcome by the establishment who loves big powerful government.  Keynesians love state power and central planning and so that is why the economic policy recommendations come from them.  Until the leadership actually starts listening to those who understand the economy like the Austrians do, the economy will never fully recover.

There is nothing the government can do to help the economy except get out of the way and let people produce and trade with each other unimpeded by the state.

Read more at dollarcollapse.com.

Like this article? Get ECN delivered to your inbox daily. Subscribe here.

Leave a Comment