[quote=mnandii]I am studying Austrian economics and it has very interesting take on our current situation.
Let me contribute the little I have gathered so far.
The route cause of our 'problems' is the interference in the free market economy by actors such as the state through a central bank.
What a central bank does is to distort the market from an equilibrium position.
You see, the policy that a CB persues may be one of two: a stable price level (hence the constant preoccupation with CPI, for example) OR a stable purchasing power of money.
So when a CB 'sees' that prices are rising or falling beyond a certain threshold it intervenes in the market by, e.g. raising or lowering the interest rate. The goal here is that the price level or the purchasing power of money should remain constant to eternity. The Austrian School finds this fallacious.
In a free market, when prices rise or fall, they do so in response to supply and demand forces which in turn lead to an equilibrium price.
The housing market in the US is a good example. Whenever the prices of houses were falling the FED intervened to keep it from falling. So artificial prices for houses were maintained until at some point the CB becomes overwhelmed and prices fall with or without intervention.
The belief that falling prices are bad is a wrong belief. An entrepreneur will invest if he/she perceives imbalances btw the price of capital goods and the price of the finished product. i.e. If even in a situation where all prices are falling, some categories will fall much faster than others. So if the price of capital goods have fallen faster than the price of the finished item, it follows that the investor will still make money.
A good example is the PC market. Years ago a mainframe computer cost many multiples more than the price of laptop today. Yet the laptop is much faster and more efficient than the mainframe. Also note that the number of computers shipped today are many multiples more than were shipped at any time back in e.g 1980s.
So the price of a computer fell yet the manufactures still manage to make profits in today's market. The lesson here is that falling prices is not necessarily a bad thing warranting intervention by a Central Bank.
In fact, what should happen in a free market is that investors will find more efficient and technologically superior ways to manufacture items at a much reduced cost and still maintain their level of profitability.
In the case of the US, since more houses were being built (hence more supply) the house prices should have been left to fall till an equilibrium price is reached. True, some people in the building industry could have lost jobs and the like, but the end result would have been a more efficient market i.e the workers would have gone to other industries where their labour would have been better utilised.
So, interference in the market causes distortions that lead to malinvestment and hence booms and burst. In another thread a wazuan had challenged me that 'booms and bursts' are merely theories on shaky foundation. I think this should be a better explanation of why they do in fact happen.
For more on the Austrian School of thought visit www.mises {Qoute)
Only true to a point, it's not that easy to move factors of production from one industry to the other in the short term. Between 2007 and 2011 when the US housing mkt was in recession, the fastest growing mkt was in smart phones and tablets (iphone/ipad?), none of the housing construction workers would have moved into these jobs. No tablets or smart phones are manufactured in the US.If the housing mkt was at its best and apple went into bankruptcy few would notice. Housing in the US is like peasant farming in Kenya, it's the biggest chunk of the economy.
Also it's very easy to say cash is king, but in reality it's better to hold a stock you know will rise if the mkt rises than to put cash in the bank and earn 1% or less in interest then come back to the mkt and buy your preferred stocks at a higher price unless you get very lucky timing the mkt.