[thebmax]

I really don't get why people who call themselves 'mainstream' economists can't see or choose not to acknowledge the issues the Austrians bring up. It strikes me as quite odd. Not everything the Austrian school preaches is correct, but they do have some valid points that I would expect most smart people to understand.

To bring up just a few big ones:

Printing money and low interest rate policy of the Fed influences many things other than the simplistic lower interest rate=more spending=more growth formula commonly preached.

1) it hurts people with savings. A good example is all the retirees who have saved their whole life and now can't survive on the 1% returns their savings are generating. The Fed is supposedly helping people and business who want to borrow and can do so at low interest rates.. but that does not trickle back to pensioners who should be earning more on their capital if they were not competing with the Fed.

2) monetary expansion stimulates the economy unequally across industries and geographic regions. In the models of the academic economic departments, monetary expansion may apply equally to an economy as a whole.. In the real world short run it is a transfer of wealth from one group (wage earners, people who hold cash or low yield bonds) to another group (banks, government contractors, rich people with lots of land and stocks). Some people benefit from low interest rates and new money, but many people are hurt by those same policies.

There are quite a few other issues that Austrians seems to be correct on, but these seem to be two of the most obvious to me.

[mikhailfranco]

Related to (1), there is the moral hazard of bailing out the extreme risk takers and profligate borrowers, but punishing the careful savers. It just encourages future financial gambling (Greenspan/Bernanke put) and Too Big To Fail mentality.

There is also the loss of true interest rate signals for making investment decisions, and consequent mal-investment caused by 'desperately seeking yield'. Economies progress by creative destruction, not protecting sunk costs in old industries and pandering to vested interests. Just look at Apple - biggest corporate cash pile in history, biggest bond issue in history - something is seriously wrong with interest rate signals (over and above the repatriation issue).

The problem of the boom was over-borrowing to consume. The solution for the recession is saving to invest i.e. create lending for building of productive capacity. Printing money to lend to consumers to buy imports does not make the economy any better, especially when you don't give it to the consumers with tax reductions (or wage increases from the corporate cash pile), but give it to the banks and let them inflate financial assets instead - that doesn't even achieve the dumb thing you were trying to do in the first place!

[parasubvert]

I was following you up to the last paragraph. the issue is that bonds and cash are effectively equivalent now due to low interest and inflation. So we are suck in a liquidity preference trap. Stocks are showing some signs of inflation, but bonds surely are not - everyone is holding US treasuries or cash!

Printing money without associated fiscal stimulus does not help things so long as people expect inflation to remain low. So QE3 is arguably better than nothing but probably will be as ineffective as thr previous attempts. OTOH Japan now is the only country where they are deliberately trying to promote inflation, so it will be interesting to observe if they can pull it off and drag themselves out of deflation.

[skylan_q]

That all sounds very silly. There is nothing complex about interest or how controlling it can effect an economy. The interest rate is just a knob you can turn to adjust inflation and employment. It's science!

[parasubvert]

I think you have a point on these two observations, though I would question (or flip) the specific groups helped/hindered by actvist government policy.

The challenge is the broader policy implications of reversing course. For example, if the intent of the economy is to encourage activity and growth, then wealth transfer should be away from savers to spenders in a liquidity trap, for example (through increased inflationary expectations).