Neo-Austrian Views of the Global Financial Crisis and Its Pre-Corona Aftermath

Abstract

In the aftermath of the Global Financial Crisis (GFC) 2007/2008 the sales of Hayek’s (1944) Road to Serfdom quadrupled, a clear indication of renewed public interest in the views of (neo-) Austrian economists on macro-economic crises, especially financial crises. It is also true that several economists associated with the Austrian school, or those using neo-Austrian insights, correctly predicted the U.S. housing bubble and the subsequent GFC, apparently, a clear vindication of (neo-) Austrian cycle theory (Hunter, 2018). More surprising is that even relatively fierce opponents of neo-Austrian macro-theory have meanwhile begun to accept some Austrian insights. We thus ought to ask, what are the basic tenets of the Austrian Business Cycle Theory (ABCT) and how did it enable some economists to correctly predict the U.S. subprime crisis and its aftermath? In contrast, it is also true that mainstream macro-economists, although struggling heavily to come up with a suitable theoretical explanation of the GFC, neither accept the neo-Austrian explanation of crises, nor its policy implications. Therefore, we also need to ask why mainstream economists dismiss ABCT. Is it the alleged neo-Austrian bias towards the supremacy of an unfettered market economy which is rejected by the mainstream, or is it rather the lack of correspondence between ABCT and the stylized facts of business cycles, such as the positive correlation between consumption and investment? We also need to ascertain to what extent the basic Mises-Hayek cycle theory can be applied to an explanation of the U.S. subprime crisis and the GFC? For example, the neo-Austrian economist Salerno (2012: p. 41) has stated that the unprecedented monetary inventions by the U.S. Federal Reserve (Fed) and the enormous government deficits run by U.S. administrations since the Great Recession (GR) must at some point lead to a 1970s-style period of stagflation. Why has this failed to materialize? We have currently experienced the longest boom in the U.S. economy since the GR, a boom which has been engineered by anti-Austrian ultra-loose monetary policy. How do neo-Austrian authors manage to cope with such a fact? Such are the research questions dealt with in the following paper. Following an introduction to the main topic, the basic elements of ABCT are presented. Then, neo-Austrian extensions of basic ABCT are applied to an explanation of the U.S. housing bubble and the subsequent GFC. This is followed by discussion of radical neo-Austrian critiques of the unconventional monetary policies used to reflate the U.S. economy after the GR. The main question here is why such policies can continue without producing an economic downturn or bust. The paper concludes with a summary of neo-Austrian views on the GFC and its pre-Corona aftermath.