Thursday, December 2, 2010

Follow-Up on the Austrian Explanation of the Financial Crisis

Via MR:
the increase in lending was greatest in 2006 and the first half of 2007,
after the federal funds rate had already returned to a level consistent
with normal benchmarks.
In other words excessively low interest rates, the crux of the Austrian school's departure from the Keynesian school, does not go far in explaining the biggest increases in lending. That is not to say that there aren't useful insights from other aspect of the Austrian school's analysis, namely the fact that agent's rationality and ability to process information from market signals is imperfect. (But one could also correctly argue that these are views that the Austrians SHARE with the Keynesians.)

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