Austrians Don’t Blow Bubbles
Remember the golden days of 2007, when we were all investment prodigies? Though I couldn’t balance a checkbook or drive a car, I had raked in 25 percent increases each year on my 401k since 2001, so I felt like a bookish Donald Trump. While I worked as a college English teacher at a school with 70 students, the nice man from Fidelity showed me how I could retire in 20 years with a nest egg of $1 million—heady stuff for a doorman’s son who’d never checked his credit rating. Dinesh D’Souza had published a helpful book, The Virtue of Prosperity, which explained to America’s Christians how to gather a spiritual harvest through our era of endless prosperity, and Karl Rove was counting the chickens who would build the Republicans’ “permanent majority.” Of course, we were also bringing modern constitutional freedoms to the whole Islamic world, so news was good from the colonies. All this, in the reign of a president for whom English was a second language. (Bush, sadly, had no first.)
We know now that all those paper profits that puffed our portfolios were as solid as tsarist rubles and that the “compassion” which briefly infused conservatism was a bribe to get a few thousand seniors to vote Republican once—in return for leaving their grandchildren eyeball-deep in debt. But wasn’t it fun while it lasted? Who could have possibly predicted that all the experts who carefully managed the investment boom, and the technocrats in academia and government who enabled and cheered them on, would wind up as deeply discredited as Bernie Madoff’s word of honor?
Harry Veryser’s lively and readable new book has the answer: the Austrian economists, that’s who. In It Didn’t Have to Be This Way, this economist and entrepreneur shows how the current morass was the unavoidable outcome of specific policy decisions, some of which reach back decades—and how thinkers of the Austrian school of economics, exiled from academia and ignored by policymakers, accurately predicted how the crisis would come.
The basic narrative is not in dispute: banks, under pressure for short-term profits and goaded by regulators who wanted to enforce racial equality in home ownership, made hundreds of thousands of loans to people who… had never checked their credit ratings. Some of them had gone bankrupt. Others earned less in a month than the monthly mortgage payments they’d soon have to make. Many were middle-class people who’d already mortgaged the homes they actually lived in; they bought additional properties they could never pay for but hoped to “flip,” on the theory that real estate prices never go down. Such loans, which any sane accounting would tally as worthless, were sliced up, repackaged, and granted AAA ratings, then sold as securities—and our retirement plans duly purchased them, which is why you and I will be working until we are 80. We all know this much.
What boggles the mind is how Harvard MBAs, Wharton professors, Federal Reserve chairmen, and other types who convene at places like Davos to plan the global future could have believed things would turn out differently. What would make someone think that worthless loans, all mooshed together then sliced thin and sold, would somehow acquire value? Did these people believe in magic? Statists like Paul Krugman and Alan Blinder who failed to see this catastrophe coming are emerging from the woodwork now to explain in retrospect that this implosion was the result of too little regulation—the natural outcome of free-market greed, unguided by the visible hand of Uncle Sam. Veryser shows that this diagnosis is pristinely, perfectly wrong, like an autopsy report that blames a lung cancer death on “not enough cigarettes to kill the tumor.”
What in fact tanked our economy was something quite simple that Veryser explains in satisfying detail: politicians eager to win votes tried to keep the economy hyperstimulated by feeding it with ever more money. As a result, there was too much money floating around with no good place to go, so banks lowered their standards and made ever riskier loans. Such “mal-investments” were doomed from the get-go, and the longer government policies tried to keep the pyramid scheme standing, the higher the tab would get. What happened in 2008, Austrians know, was nothing new; in fact, such artificial booms pervade our history, from the ultra-low interest rates Alan Greenspan gave President Clinton—which puffed up share prices for the dotcoms of the 1990s—to the stock and real estate bubbles of 1927-28. Because they direct resources to places where they don’t belong, investment bubbles amount to little more than paying people on your credit card to dig a bunch of holes, then borrowing still more to have them all filled in. Yes, this does boost employment, for a while. But what are you left with in the end?
Veryser points to such key Austrian theorists as Ludwig von Mises, Friedrich Hayek, and Wilhelm Röpke, who predicted that bubbles and subsequent crashes were the unavoidable result of politicizing the currency—of cutting the last ties between the money supply and tangible assets such as gold. It should sober boosters of the Republican Party that the last such link to gold—and hence to real-world discipline on politicians—was severed by Richard Nixon in 1971. Veryser also shows how economic, political, and international turmoil can be traced, in part, to the meddling of politicians in the otherwise self-correcting mechanism of the market: it is no accident, he says, echoing Röpke, that the collapse of international trade in the wake of the Great Depression coincided with the rise of aggressive nationalism. Either goods will cross borders or armies will; the golden age of free trade in the 19th century made possible the “long peace” that ended in 1914.
There is much more in this book than a stark diagnosis of economic crashes and a solid case for restoring some kind of gold standard; Veryser shows how most of the key principles that mainstream academics use to understand microeconomics were lifted—often without giving credit—from Austrian theorists, whose faithful disciples are frozen out of universities as “cranks.” We see how the Austrians predicted the implosion of the Soviet Union even as Harvard professors issued textbooks explaining how the Soviet model “worked.” Best of all, Veryser shows how the insights of Austrian economics can be uncoupled from the “anarcho-capitalist” politics with which they are often bundled. Ludwig von Mises didn’t favor restoring medieval Icelandic anarchy, but rather the Habsburg monarchy. There is plenty of room, in other words, for social and religious conservatives to learn from the sober analyses of the Austrians—the only school of empirical economic thought that takes seriously human dignity, personal responsibility, and the role of the natural virtues in promoting the common good.