Revolution within IMF?

I don’t know if one of the editorials from The Korea Herald should be an occasion for rejoicing. While reading Stephen Richter’s “The silent revolution underway inside the IMF”, my emotion is mixed. The writer is talking about reform and revolution. I assume Austrian economists would question even the very existence of the IMF and would go for its abolition.

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The writer himself is negative towards the IMF for he describes it as an institution “whose machinations have proven to have effects similar to nuclear radiation.” However, the irony here is that a destructive institution such as the IMF is now criticizing another destructive financial institution, the Federal Reserve.

New voices within the IMF are now exposing the negative impact of the Fed’s financial stimulus on emerging markets. Quantitative easing is said to have failed in boosting the real economy and “has mainly boosted the stock market.” And now, even the effect of the stimulus package on the stock market is “wearing off”.

The writer identified these new voices.  They are Tharman Shanmugaratnam of Singapore and Guido Mantega of Brazil. Richter even praised Brazil and South Korea for their “counter-cyclical capital account regulations” (I do not know exactly the meaning of these regulations).

In concluding the editorial, Richter is happy. He invites the world to rejoice with him:

“The world at large has reason to rejoice in the fact that the IMF is taking off its self-imposed ideological blinders. If the current trend of change continues, and all indications are that it will, it would represent a big step forward for better global governance.”

Will you accept Richter’s invitation?

Reference: Richter, Stephan. January 13, 2012. “The silent revolution underway inside the IMF”. The Korea Herald.

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Austrian Business Cycle Theory Reaching Mainstream Economists

It is good to know that the Austrian Business Cycle Theory has finally reached mainstream economists. The response varies. Thanks to 2008 global financial crisis. To me this is an indication of the fulfillment of a foresight.

Beginning 2010, I have been encountering in the web that existing economics will undergo transformation. Mainstream economists can no longer afford to ignore the voice of the Austrian school.

A paper written by Jerry H. Tempelman is an example of the influence of such voice. His topic is the “Austrian Business Cycle Theory and the Global Financial Crisis: Confessions of a Mainstream Economist”. He wrote it in 2010.

The paper is structured around three parts: the identity of those who oppose the business cycle theory, the summary of the theory, and the influence of the theory on several mainstream economists. I just want to follow this order in sharing my own understanding of Tempelman’s paper.

Opponents of Austrian Business Cycle Theory

Milton Friedman tops the list of those who oppose the Austrian Business Cycle Theory. For Friedman, the theory does not provide an accurate explanation of economic recession. It lacks verifiable evidence in actual practice.

Unfortunately, Friedman was not able to witness the 2008 global financial crisis. He passed away in 2006. He was no longer there to witness the specific fulfillment of the theory.

Allan Greenspan is another key personality that opposed the Austrian school. He is a Keynesian. Due to his influence, the voice of William R. White, an Austrian influenced economist was ignored.

Prior to 2008 crisis, White predicted an economic crisis that would result from real estate bubble. His warning was not seriously taken. He actually identified central banks as primary responsible for the crisis due to monetary easing policies. The response to White changed when his prediction happened.

Overview of Business Cycle Theory

Tempelman acknowledged that among several schools of economics, the Austrian school is now considered the most reliable source of interpretation of the 2008 global financial crisis with its business cycle theory. He gave an overview of this theory. It is good that he distinguished between two types of economic booms – sustainable and unsustainable. I find it very helpful.

An economic boom is considered sustainable if it is an outcome of escalation in investment funded by growth in saving. On the other hand, it is unsustainable if the resulting escalation in investment is derived from credit expansion by monetary authorities. This kind of economic boom will certainly end in bust.

Ordinary people find it difficult to identify the dynamics that follow after credit expansion. They include lending money at low interest rates, distortion of vital economic information, negative impact on entrepreneurial decision, and unproductive use of capital. The end of the process is economic decline.

The Austrian Business Cycle Theory described above was proven true in the 2008 economic crisis. The credit expansion and mal-investment that characterized the years prior to 2008 was the primary cause for the decline both in financial market and the total global economy.

The Influence of Business Cycle Theory on Mainstream Economists

The names of mainstream economists mentioned in the paper include William Dudley and Paul Krugman. The Economist is also mentioned. Other mainstream economists using different methodology and whose economic researches are classified as “on the cutting edge” are also identified.

Tempelman noted William Dudley’s analysis of the Federal Reserve has many features common in the Austrian school. Paul Krugman also voiced out his criticism of the Fed for its ability to create boom and bust, an idea borrowed from the Austrian school. The Economist even cited the analysis of Ludwig von Mises criticizing the Fed’s monetary stimulation policy. The economic website also recognized that numerous qualities from Austrian business cycle theory characterized the economic decline both in the US and Japan.

Mainstream economists who utilized different methods include Taylor (2007), Jarocinski and Smets (2008), Smithers (2009), and Vogel (2010). All of them, though they used different approach arrived to a conclusion almost similar to the ideas of the Austrian school. Taylor for instance identified the correlation between the Fed’s monetary policy and the boom in the housing industry. Jarocinski and Smets confirmed this findings using “Bayesian vector auto-regression”. Furthermore, Smithers identified the connection between the irresponsible action of central bankers and global financial crisis. Finally, Vogel observed a sequence of events leading to financial crisis. It all started with the Fed’s monetary policy followed by 2001 economic recession leading to house bubble, which collapse finally resulted to the global crisis.

Tempelman mentioned three among cutting edge mainstream economic research. The first type of research focused on financial leverage and liquidity. Someone mentioned in the paper that a growing body of literature has been focused on this important subject. The works of Tobias Adrian and Hyun Song Shin (2009) is just one example of this type of research. Again the works of these scholars appear to be an echo of the message of Austrian business cycle theory.

Another type of research resonates the voice of the Austrian school is simply focused on liquidity. Brunnermeier (2009) argues that the face of macroeconomics will certainly change and a new economics will emerge considering the contribution coming from the macro, the micro, and financial economics.

The third type of cutting edge research concentrates on behavioral interpretations of business cycle. This one is considered complementary to Austrian Business Cycle Theory.

Conclusion

Tempelman wrote that since 2008 crisis, Federal Reserve officials have shown some “positive signs” acknowledging the mistake of their monetary policy. They admitted that low interest rates for too long does not really help, but has made the crisis more severe.

Some ideas for monetary reform are now considered. Unfortunately, in spite of the accuracy of the Austrian school, its proposal is still considered too radical and therefore rejected. The proposal includes closure of central banks, return to gold standard, free banking, and monetary competition.   

Personal Response

Immediately after the crisis, central banks escaped public blame. All fingers are pointing to free market capitalism. That’s the power of mainstream media. Statist interventionism is doing its best to find a scapegoat.

Thanks to alternative media and bloggers. Thanks also to the influence of Ron Paul. Central banks now are exposed. In time, the role of statist interventionism on the global crisis will also become part of mainstream consciousness.

Regarding the paper, I observe that despite the fact that core features of Austrian Business Cycle Theory were fulfilled in 2008 crisis, mainstream economists are still hesitant to acknowledge the direct influence of the Austrian school in their economic interpretation. This is my personal impression after reading the paper. I think this observation also applies to Templeman’s position. Even though he was in favor of the Austrian school, somehow he remains reserve in the way he presented his material.

As a whole, I appreciate the fact that the Austrian Business Cycle Theory is making an impact among mainstream economists. How I wish that such impact would lead to a thorough study of the Austrian school of economics and the abandonment of the Keynesian economic framework. I also wish to see the fulfillment of George Reisman’s vision in our generation: the spread of Austrian economics literature into the library of universities worldwide. I believe that such education would enable economists to see the real colors of dominant ideologies behind our present political and economic turmoil around the world. I am hopeful that the exposure of the schemes of socialism and statist interventionism would lead to a new appreciation of genuine free market capitalism. And this would mean a better future for global economy based on personal liberty, honest money, and private property.

Expecting Quality Content from Christian Writers

Distracted is an appropriate description for me this month of December for I really find it hard to concentrate writing articles for this site. I have two topics in mind, which I find interesting, but I could not push myself to start writing. These are about the approaching events on January 1, 2013 and comparison between Obama’s victory speech and Ron Paul’s farewell speech from US Congress.  I have eight days more to write about the first topic. I think the second topic can wait.

I prefer trolling instead of writing, that’s my struggle. And then suddenly, while trolling on the net I just bumped one thread forum about RH bill. I had exchanges of ideas with the initiator until discussing about the topic in economic terms. At the middle of the discussion, the thread initiator shared to me a link to a Christian website about economics and business.

After reading a dozen of articles from that website, I felt dissatisfied with the shallowness of the content. Such dissatisfaction afflicts me every time I read economic and financial articles from Christian sources. There are exceptions of course. North is one of them.

Most of the writers I encountered are simply promoting their books. It appears to me that these writers are unaware that anyone could access content far superior and more accurate at no cost.

Comparing the content of Ludwig von Mises and LewRockwell with Seven Mountains and Center for Christian Business Ethics Today, I could not control my dissatisfaction, and that’s why I am writing this article. I think these latter sites could have improved their “theologizing” if they would just devote some time learning first the Austrian school of economics.

Those who want to see an example of great discrepancy in quality of content, why not try reading “God and the Financial Crisis” and compare it to any related article from either Ludwig von Mises or LewRockwell. Or try watching videos by Wayne Grudem and David Cowan. Then compare them to “Fight of the Centuries” and “Fear the Boom and Bust”.

Despite my unfairness in my comparison and my failure to see the differences in context of the two types of content, I am still craving for solid information coming from Christian writers. How I wish that the “authority” in Christian circles should stop their half-baked analysis and start thinking hard about global finance and economy.  Why not start learning the Austrian school of economics?

Typical Misunderstanding of Capitalism

In November 2008, Scott Stephens wrote his piece in response to global economic crisis. Rev. Stephens is the minister of Forest Lake Uniting Church and teacher of theology and ethics at Trinity Theological College. His article, Dishonest money: What the financial crisis tells us about ourselves is a typical example of misunderstanding the real character of capitalism.

Free Market

If a capitalist billionaire himself with the caliber of Warren Buffett could misunderstand capitalism, it is but natural to see typical misunderstanding of capitalism similar to Rev. Stephens’. This is where we need discernment to see beyond the appearances of things and also the ability to distinguish between dominant social themes and alternative story.

The influence of mainstream media is very powerful to shape public opinion. Add to it the popularity of both the external and internal critics of capitalism. From the outside, we have the Marxists; and from the inside, we have people like Scott Stephens who himself enjoyed the blessings of capitalism. Both camps agreed in their analysis of the inherent flaws of capitalism.

The fear of Peter Schiff is not at all baseless. He is worried that the worsening crisis would be blamed on capitalism. This is exactly what is happening. Only few are able to take a deeper look at capitalism and realize that the so-called “inherent flaws” are really not coming from the free market, but from another version of it.

A good place to start in this social discernment is to learn the distinction between the economic positions of Warren Buffett and George Reisman. But before we do that, allow me to identify first the misunderstanding in Scott Stephens’ article. After reading Stephen’s article, you can compare it with George Reisman’s open letter to Warren Buffett and see for yourself the discrepancy between two versions of capitalism.

Scott Stephens rightly identifies as “dishonest money” the modern economic phenomenon of monetary expansion. The 2008 crisis not only exposed its faulty foundation, but according to Stephen should also lead to self-examination as to our participation in this crisis due to greed and extravagant lifestyle. Furthermore, it ought to direct us to a realization working for common good and the need for alternative community with a different economic system. He looks to the Church to provide such a community with an economic system different from capitalism.

This is the point that disturbs me, his association of “dishonest money” with capitalism. He appeals to history as his basis. He identifies that monetary expansion has been in existence since 4th century B. C. Aristotle was actually “shocked to observe that the efficiency and simplicity of the market seemed to unleash something monstrous in the human heart.” He further narrates that as people perceived the potential of monetary expansion, they started to lust after unlimited profit. This seemingly unlimited increase in the quantity of money carried with it destructive moral vices like greed, dissatisfaction, and loss of self-control.  Stephens then mourned that those destructive vices in time have been turned into “celebrated virtues” serving as the basic foundation of modern economy. He then concluded, “Capitalism thrives only through these vices.”

As we will see in Reisman’s open letter, it is not actually the free market that unleashed those destructive vices. It was something else. It was the government intervention appearing as “free market.” Stephens’ reading of capitalism is a typical example of misinterpretation of capitalism and an evidence of the success of intervention done by the state.

Stephens’ hope “that those in positions of influence will find a just and effective response to the current credit contraction,” is actually a resignation. Can we really expect that those in power would initiate genuine monetary reform apart from the initiative of an informed public? As Murray Rothbard rightly identifies that due to the combination of both evil and good in human nature, those in power could actually utilize their privilege position for legalized theft.

Stephens’ longing for an alternative community with a different economic system exemplified by the Church could only happen on the basis of a solid understanding of what is really going on. This requires education leading to concrete action. Here I think the Austrian school of economics could provide the necessary tool for us to re-examine the real nature and character of free market economy. 

Part 2

Disappointed and…Encouraged

After writing “Savior of Capitalism and Champion of Free Market,” I happened to join a LinkedIn group, Ludwig von Mises. Since I am new to this “Austrian School,” my intention in joining is just to have a feel of the current developments in Austrian ideas. One thread caught my attention. It is about Milton Friedman.

To my surprise, members of the group are praising Friedman as a libertarian. I could not understand for it is contrary to what I have been reading so far. So I raised a question and quoted Murray Rothbard about the need to precisely identify the economic position of Milton Friedman. I received an immediate reply implying that Rothbard’s position is invalid in “real world economics,” and Rothbard himself an “escapist” into economic fantasy land. The responder further asserts that to ignore the contribution of Milton Friedman going to the “right direction” is foolish. Murray Rothbard is foolish in the eyes of this group member.

Being a new member, I just voiced out my disappointment by stating what I thought to be in his mind. My greater disappointment is caused by the silence of other members that to me, it only means that the position of the group on Milton Friedman is the dominant one.

Resulting from that experience, I made a tentative conclusion that for Austrian ideas to spread, the economic position of the followers of Friedman must be exposed. They claim to be proud members of the “libertarian” camp. To me, they are nothing but confused followers of the statist version of “libertarianism” and “free market” ideas.

After a day, as my custom, I visited LewRockwell.com to see new articles written by Gary North. I am happy to read The Future of Austrian School. It is a confirmation of my early conviction. I am glad to receive such confirmation from an Austrian economist himself about the future of Austrian School. In that article, North reports about a seminar at Mises Institute attended by more than 150 students from 20 different countries. As a result of such experience, he foresees a promising future for the spread of Austrian ideas. He recalls that from a humble beginning in the 1950s, the Austrian mindset is now an international movement that is rapidly growing.

North cites how the web serves as a powerful tool to educate the people. The present economic crisis is waking up increasing number of people to the significance of Austrian thoughts. Ron Paul is the common starting point for most people. His consistent message serves as an eye-opener to many.