<blockquote>'The
Austrian School works with a world where money and finance can have repercussions on the real economy, primarily through the effects of financial signals and credit flows on the allocation of productive resources. So too did J.M. Keynes and Hy Minsky, and so too did
Dr. Kurt Richebacher. It is a world most of us would recognize as part of our actual experience in the economy.
Contemporary macroeconomics has little room for money and finance to matter. General equilibrium theory, the intellectual pinnacle of the profession, has no room for money. Real business cycle theory has no room for finance – negative shocks to productivity, virtually from out of the blue, are the stated source of recessions. The Taylor rule, which ostensibly guides central bank policy rate setting, has an interest rate but no room for either money or finance, unless it is packed away in the error terms of the canonical equations. Recently, the Henry Kaufman Professor of Financial Institutions at Columbia University and his co-authors concluded the US housing bubble had little effect on consumer spending patterns. Huh?
Investors clobbered repeatedly by financial crises have good reason to search beyond conventional economic analysis. Much of the mainstream approach to economics has made itself irrelevant or at least foreign to our actual experience. Indeed, there is an argument to be made that the representation of human behavior in mainstream economics has approached qualities that would more likely be associated with people struggling with various degrees of autism (you will find this notion, which actually deserves to be taken more seriously, developed in greater detail at www.paecon.net: a quick glance at the quotes from contemporary economists in the left column will convince you that some members of the profession know there is a problem).
...
Calls for a second round of fiscal stimulus have begun to crop up around the US in recent weeks as fears the green shoots will fade to brown have been fed by a weaker than expected employment result, more signs of debt distress, and the continued ravages of home price deflation. That such calls are arising just weeks after investors were debating the prospects for hyperinflation dynamics taking hold, and bidding up commodity prices while selling Treasury bonds, tells you something about the deep uncertainty that still prevails. We are indeed in uncharted waters. What remains missing is any serious investigation of a new global growth model. The old one, based on consumer debt binges fueled by serial asset bubbles on the one hand, and headlong expansion of productive capacity in low labor cost countries that prefer to accumulate foreign currency reserves in part to manage currency pegs, is impaired enough that even the IMF realizes the scope of the challenges ahead.
On the US side, we know issues of private sector deleveraging, energy independence, water infrastructure, education and health care need to be addressed. Entrepreneurs, investors, policy makers, and economists best train their efforts in these directions to craft a plausible way forward from what is clearly not a garden variety recession with a conventional monetary or fiscal policy fix. If public/private collaboration is required to execute solutions in these areas because investors and creditors remain too short term oriented or too risk averse, then so be it. Reality has intruded on a global growth model that has proven itself unsustainable. Time to drop the delusions and move forward.'
- Rob Parenteau,
Reality Intrusion, July 7, 2009</blockquote>