yeah -- he sidesteps the real issue -- call him a "situational economist." Doesn't mean what to do now isn't a good question ... it's just that policy makers will continue to do what they think has worked: Paper over the problems, so any thoughtful approaches won't be tried anyway ... guess we have to expect this from McCulley. After all, he is one of THEM. <vbg>
>>Members of the Austrian school of economics vehemently disagree, arguing that capitalism's boom-bust pathologies, even if they exist, are magnified, not tempered, by the visible hand of government. In particular, Austrians hold central banking in high contempt, arguing that fiat credit creation (printing-press money!) is the dominant source of capitalism's boom-bust proclivities.
And contrary to the presumption of the legions of Austrians who write me every month (to accuse me of macroeconomic immorality!), I actually have some sympathy with the notion that central bank policy can be a source of boom-bust pathology itself. But I call that bad central bank policy, not an indictment of the legitimacy of central banking.
Good central bank policy involves tempering the pro-cyclicality of capitalists' human urges by acting counter-cyclicality: watering down the punch before the partiers start swinging from the chandeliers, and offering Alka Seltzer before the hung-over partiers start gagging themselves with spoons. Thus, I agree with current-day Austrians that the origin of the current risk of a debt-deflation meltdown was not just irrationally exuberant capitalists, but the enabling hand of the New Age Economy's chief bartender, Alan Greenspan. He could have tempered irrational exuberance, and should have tempered irrational exuberance. And he didn't.
Where I disagree with modern-day Austrians is in their righteous advocacy that the time has finally come for Greenspan to repent his sins and make drunken capitalists drink ipecac, rather than serving them yet more monetary policy accommodation. The Austrians are bedfellows with Treasury Secretary Mellon, who said to President Hoover in 1931 that the time had come to:
"Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness of the system. High costs of living and high living will come down. People will work harder, live a more normal life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people."
Mellon's advice, and modern-day Austrians' amen chorusing is a perfect prescription for a debt-deflation meltdown. And, my friends, two wrongs do not make a right. Yes, it may have been wrong for Greenspan to have enabled the bubble, but it would be even more wrong for him to embrace debt-deflation in repentance.
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