Are We All Austrians Now?

“We’re all Keynesians now” had been the academic and political edict of the 1960s and 1970s following a series of interventionist economic measures by Presidents Lyndon Baines Johnson and Richard Nixon that altered the complexion of the United States. The U.S. government abandoned any semblance of respect for the conservative traditions, while embracing the diverse array of big-government schemes emanating from the minds of central-planning crusaders. Fifty years later, the famous statement had been revived after Republicans and Democrats threw everything but the kitchen sink at the Great Recession. As the latest fiscal and monetary endeavors become a parody at this point, the smartest men and women in the room are starting to question the statist response to the coronavirus-induced financial crisis. A shrug, a chuckle, and an eye roll – what else would they do but more of the same?

Austrian Economics: A Primer

Austrian Economics is a school of thought that can be traced back to the times of Saint Thomas Aquinas and his explanations of human action. For the next several centuries, prominent minds – Richard Cantillon, Carl Menger, Ludwig von Mises, Frederic Bastiat, and Murray Rothbard – turned classical economic thinking on its head by homing in on subjective value, marginal utility, time preference, and individualism. It stresses the utmost importance of free markets, and it warns against the dangers of the state. The great Henry Hazlitt dismissed the idea of only good economics and bad economics because economists who identify with the Austrian school "believe that its fundamental theses are true, and offer more promise than any other for further progress in economic science."

Good Night, Vienna

Liberty Nation Washington Political Columnist Tim Donner recently said it best: "No matter how you cut it, through a harrowing and unforgettable wave of chaos, hardship, and strife we never saw coming, only one thing seems certain: after 2020, we will never be quite the same." And that is true for every facet of society, including the world of economics. This year has been astounding for the fact that the entire financial community essentially conceded that it relies on the Federal Reserve’s money-printing and cheap cash injections to survive. The great minds on Wall Street had peddled the nonsense that the fundamentals of the stock market were sound, but COVID-19 pricked the Everything Bubble, leaving these same people to plead for the Fed to do anything to stop the hemorrhaging and prevent the equities arena from imploding. Like a genie, the central bank granted the New York Stock Exchange’s wishes with unlimited quantitative easing and near-zero interest rates. But the Fed is more like Faust’s iconic Mephistopheles character, with the stock market selling its insolvent soul for the S&P 500 and the Nasdaq Composite Index to hit all-time highs amid a pandemic. But at least reputable figures are finally having their come-to-Jesus moment. It is better late than never. Speaking in an interview with CNBC, former Goldman Sachs CEO Lloyd Blankfein admitted that he sees "bubble elements" in the stock market due to historically low rates producing free money for the power players on The Street. "The wash of money is clearly creating bubble elements. You look at SPACs, and how much money is available on the basis of someone’s reputation, as opposed to a business plan," he told the business news network. People are lending to what historically have been viewed as weak credits for very little money." Boston Federal Reserve President Eric Rosengren recently lamented on years of low rates exacerbating the present economic downturn. Rosengren was candid about a coming tidal wave of defaults and bankruptcies, as well as ZIRP making an economic recovery harder to realize.

“Clearly a deadly pandemic was bound to badly impact the economy. However, I am sorry to say that the slow build-up of risk in the low-interest-rate environment that preceded the current recession likely will make the economic recovery from the pandemic more difficult. “This increase in risk-taking is more likely to take place in a low-interest environment, like the one which prevailed in the aftermath of (and as a result of) the financial crisis and Great Recession. “The build-up in risks in commercial real estate, and leverage in the corporate sector, prior to the COVID-19 pandemic are likely to result in more bankruptcies and higher unemployment during this crisis than if less risk had been taken.”

Scott Minerd, Guggenheim Global chief investment officer, thinks the Fed's new inflation approach will make it "virtually impossible" to prevent bubbles in asset prices. Fed Chair Jerome Powell conceded to Congress during his semi-annual testimony that the federal deficit is unsustainable, but that now would not be an appropriate time to worry about the exploding national debt. In other words, America's finances are in disarray and will never be resolved, so why bother in the middle of a public health crisis? This sounds a lot like the Austrians.

Who Cares About the Austrians?

Austrian economists, academics, and writers have been sounding the alarm for years about the ramifications of artificially suppressing interest rates and the bubblemania that is pervasive throughout the economy. They have also raised red flags about the ballooning national debt, the moral hazards, and asset inflation. But who listened? Better yet, why would anyone care? The leading benchmarks ascended to record highs, politicians and monetary policymakers were championed as omnipotent creatures from another dimension, and everyone had been – and still is – making money. The Fed is the least sexy subject in political discourse, and it is understandable why most people are unaware of how the Eccles Building’s tentacles extend into every crevice of society. When a nation adopts the Keynesian moniker of “in the long run we are all dead,” Austrians’ sound analyses and eloquent messaging would never stand a chance of being heeded. Politicians get re-elected, the Fed’s power is never questioned, and institutional investors’ bottom line gets padded. Ain’t life grand in the Swamp? Are we all Austrians now? ~ Read more from Andrew Moran.