The Austrian School on Business Cycles: 100 Years of Being Right

0:00Good morning, ladies and gentlemen, and welcome to the Austrian Scholars Conference 2010. I'm the director, Joe Salerno. As in past years, we have an exciting pinch of social sciences and humanities. I'm especially pleased that we can bring you this program in our beautifully renovated facilities, thanks to our many generous benefactors like Jim Wolf, whose name designates this wonderful space we are in. When the first ASC was held in 1992, we were right at the very beginning of the great bubble economy brought to you by Alan Greenspan and company at the Fed. The shiny, bubbly economy has finally gone the way of all inflationary economies in history, deflating into dirty dishwater and swirling slowly but surely down the recessionary drain.

0:48But it has left in its wake something very amazing, or truly amazing, something which never could have been foreseen in 1992, a second Austrian revival. The first Austrian revival blossomed in 1974 when a group of 30 Misesian economists met in the tiny, and some still say haunted, hamlet of South Royalton, Vermont. In the same year, Friedrich Hayek, Mises' preeminent follower in Austria, was awarded the Nobel Prize in Economics for his path-breaking work in monetary, capital and business cycle theory. But despite these events, Austrian economic theory did not have an impact on mainstream economics or on economic journalism and financial commentary. Hayek and Murray Rothbard were relegated to the soft areas of economics like methodology, political economy and social philosophy. Yet some mainstream economists admitted that Austrians had insightful criticisms of positivist methodology and that they made a provocative case against socialism and for the free market economy. But Austrian economic theory was dismissed are all just out of hand if it was noticed at all.

2:05Thus, many Austrians abandoned technical economic theory altogether and drifted off into what the mainstream considered the intellectual backwaters of methodology and comparative economic systems, where they felt that they could get a hearing for their views. All that has now changed with the sudden and total destruction of the false prosperity built upon more than a decade of low interest rates and fiat money inflation. Without fanfare or another Nobel Prize winner, the second Austrian revival has grown spontaneously out of the failure of mainstream macroeconomists to adequately explain the collapse of the bubble economy and the need for government bailouts of almost the entire financial sector. We can date this second revival almost precisely to August 2008.

2:53From that point on, the use of online Austrian resources doubled from one year earlier, as large financial institutions began to topple over into bankruptcy one after another in the fall of 2008. But unlike the first revival, the second revival of Austrian economics has focused on the economic theory of Mises, Hayek and Rothbard. Paul Krugman and Brad DeLong, two prominent uber-Keynesians, now feel compelled to learn about and try to refute the Austrian theory of the business cycle. Other macroeconomists, such as Leo Hanian of UCLA, have been inspired to re-examine the historical record and have concluded that Rothbard was indeed right about the causes of the severity of the Great Depression.

3:42In an article accepted by one of the leading mainstream theoretical journals, the Journal of Economic Theory, Ohanian concluded, quote, the depression is the consequence of government programs and policies, including those of Hoover, that increase labor's ability to raise wages above their competitive levels. With the failure of sophisticated macro models to predict or even explain the financial collapse and Subsequent Great Recession, Mainstream Macroeconomists have lapsed back into simplistic Keynesianism, calling for ever more deficit spending and zero or even negative interest rates. The only coherent alternative to this position is now Austrian monetary and business cycle theory. It is the 1930s we visited, the dust has settled and the field has been cleared of the fallen and once again it is the Hayekians facing off against the Keynesians.

4:38It is important to note that this renewal of interest in Austrian economic theory may have quickly fizzled out if the resources were not available to support it. Many of these intellectual resources were provided by the Mises Institute. In particular, Rothbard's America's Great Depression was kept in print and a second edition of his Mystery of Banking was brought out in 2008. Prices and Production and Other Works, a collection of Hayek's most important theoretical writings, many long out of print, was also published in 2008, followed by his more popular Tiger by the Tail in 2009. In addition, the Mises Institute has made available online almost all the important works in Austrian economic theory that have been published since the founding of the school by Carl Menger in 1871.

5:25So this year ASC is very special. We are here not just to teach and learn from one another, but to set the agenda for the future of economic science. Now I am especially pleased to introduce the Murray N. Rothbard Memorial Lecture. I knew Murray personally and considered him a friend and mentor. Dr. Mark Thornton received his Ph.D. in economics at Auburn University. He has published articles in many scholarly and popular journals. He is the author of The Economics of Prohibition and co-author of Tariffs, Blockades, and and Inflation, The Economics of the Civil War with Robert Eaklin. He is the editor of the Caudable Mises and the Bastiat Collection. Dr. Thornton has taught economics and business at the undergraduate and graduate levels at Auburn University and Columbus State University.

6:12He was the editor of the Austrian Economics Newsletter from 1984 to 1992. He served as assistant superintendent of banking in Alabama and was an economic advisor for Governor by Bob James from 1997 to 1999. He is currently a senior fellow at the Ludwig von Mises Institute and the book review editor of the quarterly journal of Austrian Economics. He will speak to us today on the Austrian School on Business Cycles, 100 years of being right. Ladies and gentlemen, please join me in welcoming Dr. Mark Thornton. Thank you, Joe. It's a great honor to be giving the Murray and Rothbard Memorial Lecture. I, of course, would like to thank the Mises Institute, Lew Rockwell, Doug French, Jeff Tucker and Joe Salerno for helping make this possible along with, of course, all the members and donors who make the Institute happen.

7:13My task today is putting the Austrian theory of the business cycle to the test. There's There's been a debate raging in the economics profession. We've been going back and forth for a century. No, that's not actually the debate that I'm talking about here, but I just wanted to say that. The debate that I'm talking about is only a little over a decade long and it's over whether the Austrian economist still passed the market test in academia. Journalists from the Chicago School and the Public Choice Schools have been arguing recently, in recent years, that Austrians no longer pass the market test. So that means we know we've got them worried. We don't appear in the mainstream journals. Austrians, in turn, have argued with journal articles vigorously the opposite case, with various stipulations and empirical evidence. My own answer, which was based on Austrian theory, was that academic Publishing Processes did pass the market test. It was as good as the market. And the paper, oddly enough, was quickly accepted for publication in, of all places, the journal Public Choice. However,

8:31the referees and editors failed to detect a critical caveat in my analysis, or maybe they just let it slide. It wasn't hidden, but when Walter Block read the paper, he called me a trader. What I actually found was that the academic publishing process only mimics the marketplace if all resources are private property. And of course, in reality, that's just not the case. Government money dominates the academic process entirely. And as a result, the academic publishing process is chaotic, fundamentally flawed, and totally biased in favor of government. I think that Larry White's paper drawing the connection between the leading journal editors of monetary and macroeconomics and money from the Fed really highlights that whole point.

9:23So today I propose a new test for economists, a truer market test, a test that is heavily biased in favor of mainstream economists and heavily biased against the Austrians. How well do economists from the Austrian School predict business cycle crises and how well do economists from mainstream economics predict economic crises? What makes this an interesting test is that Austrian economists are vastly outnumbered by the mainstream and they do not even consider prediction as part of economic science, while the mainstream economists, of course, vastly outnumber us still and place prediction as as the central purpose of their discipline. So today I'm going to report on a series of articles that I've done about economic crises in the United States over the last 100 years and to see what Austrians were doing and to see what mainstream economists were doing.

10:21I actually became interested in Austrian economics because I was interested in the Austrian theory of the business cycle. I was already an economics major and a libertarian when Roger Garrison introduced the subject to me at a summer conference. I immediately recognized the Austrian theory as one that explained the high unemployment and the high inflation that existed in the economy when I was in college. So when I returned to college in the fall, I decided to take a course on business cycles. And I was shocked to learn that the Austrian theory of the business cycle was not even in the textbook whatsoever. I talked to my professor and he was unfamiliar with it until I mentioned that F. A. Hayek had won the Nobel Prize for his contributions to it just a few years prior and then he sort of feigned interest in the subject but he told me that the course was going to be taken out of the curriculum entirely when he retired because it was no longer necessary. So the next thing I did was I decided well I'm going

11:26Now I'm going to get serious about this and I found a young professor who was willing to supervise an independent directed readings course on Mises and Hayek and the Austrian Theory, the business cycle. He told me that the Austrian Theory was never mentioned to him at all in graduate school at the University of Chicago, but that his grandfather had taught him about it. At the end of the semester I turned in my paper and this professor correctly I often criticize my paper for failing to highlight the nuances in the Austrian approach and for insufficiently distinguishing between it and other theories. I immediately realized that I had not struck the proper balance in this project. It turns out I was far too independent and not sufficiently directed.

12:15These problems were resolved when I found a copy of Murray Rothbard's America's Great Depression. Here was a clear statement of the Austrian theory of the business cycle and a brilliant and detailed application of it to America's Great Depression. I was finally able to get my hands around the theory and to understand it as a vital tool of analysis. As graduation approached, the unemployment issue grew ever more important because it was now my own unemployment that was at hand. is no longer an academic issue. So I applied to various graduate programs and ultimately chose Auburn University as one of the most Austrian-friendly and really the only opportunity to study the Austrian Theory of the Business Cycle that I considered. When I arrived at Auburn, however, I realized that I was mistaken. I was told that the Austrian School was a thing of the past and that there were few remaining Austrians who were near retirement or were not teaching at Ph.D. granting institutions and therefore it would die out.

13:22I was even told by one professor that the Austrian Theory of the Business Cycle was a grisly embarrassment. Now of course Roger Garrison did smuggle the topic in a little in his class but the overall message was clear, stay away from the Austrian Theory of the Business Cycle. In fact I was even considering dropping out of graduate school when I learned at the Mises Institute was going to soon move to Auburn. So I remained a micro and a policy economist until my next bout of unemployment. This occurred when my employer, Governor Bob James, lost his re-election bid. And this was right about the same time, right after this market test debate was launched in the Journal of Economic Perspectives in 1997.

14:10And amazingly, Columbus State University hired me as a macro economist. I didn't learn about that until after I had actually been appointed, but I was going to be the macro economist there. And it was here that I started my work on Richard Cantillon, who Murray introduced me to, and also I started some work about putting the Austrian theory of the business cycle to the test. In chronological order, the first test, of course, comes with America's was Great Depression in the 1930s. The 20s were a new era in the economy. It was a time of numerous new technologies. The economy was booming. The stock market was in a bubble. Newly elected President Herbert Hoover said that unemployment was widely disappearing and that, quote, we were nearer to the final triumph over poverty for the first time ever in History. This new era of thinking dominated Wall Street, the media, and politics as well as academia. Irving Fisher, who was the most prominent American economist at the time and

15:17is still widely considered the most important mainstream economist in history in terms of America, he's somebody who virtually invented macroeconomics and monetary policy in the United States, and he was an enthusiastic supporter of Herbert Hoover, alcohol prohibition and his own policy of stabilizing the value of the dollar. This scientific stabilization of the dollar that Fisher had invented in large part was being practiced at the Federal Reserve. On the eve of the great stock market crash of 1929, Fisher assured investors that he foresaw no problem in the stock market. Quote, There may be a recession in stock prices, but not anything in the nature of a crash.

16:07Dividend returns on stocks are moving higher, and this is not due to receding prices of stocks, and will not be hastened by any anticipated crash, the possibility of which I fail to see. That's Fisher. He's the great American economist, and he's actually out there in the public telling that to the New York Times. Was the Great Depression predictable? Was it preventable? Of course, the failure of the market economy to right itself in the wake of the Great Crash is probably the most pivotal development in modern economic history and its impact has continued to shape mass ideology and to determine public institutions and policies ever since.

16:55So this is probably the most important thing of all time. Well in Austria, economist Ludwig von Mises apparently saw the institutional problems developing at an early stage and forecast to his colleagues as early as 1924 that the large Austrian bank, Creditanstalt, would be bankrupt. More importantly, he wrote an entire book which was published in 1928 called Monetary Stabilization and Cyclical Policy, in which he targeted Irving Fisher's monetary reforms and his reliance on price indexes as a key vulnerability that would bring about the Great Depression. Mises concluded, quote, because of the imperfection of index numbers, these calculations would necessarily lead in time to errors of very considerable proportions.

17:53Mises found that Fisher's reform attempts to stabilize purchasing power of the dollar were riddled with inherent technical difficulties and was incapable of achieving his goals. Quoting Mises, in regard to the role of money as a standard of deferred repayment, the verdict must be that for long-term contracts, Fisher's scheme is inadequate and for short-term commitments it is both inadequate and superfluous. He then demonstrated how fissure-type monetary reforms cause booms in the economy and that these booms inevitably result in crises. In addition to demonstrating the inevitability of the crisis, Mises clearly identified the cause where most others could not, quote, it is clear that the crisis must come sooner or later.

18:41It is also clear that the crisis must always be caused primarily and directly by the change in the Conduct of Banks. If we speak of error on the part of banks, however, we must point to the wrong they do in encouraging the upswing or the boom. The fault lies not with the policy of raising the interest rate, but only with the fact that it is raised too late. He showed that the central banks attempt to keep interest rates low and to maintain the boom only make the crisis worse. Quote, the only way to do away with or even alleviate the periodic return Under the trade cycle, with its denouement, the crisis is to reject the fallacy that prosperity can be produced by using banking procedures that make credit cheap.

19:30As Frank Shostak writes in the foreword of The Causes of the Economic Crisis, the latest edition of Mises' The Causes of the Economic Crisis, he writes of Mises, quote, here we We have evidence that of the master economist Ludwig von Mises, who foresaw and warned against the breakdown of the German mark, as well as the market crash of 1929 and the depression that followed. Of course, in addition to Mises, his student F. A. Hayek was predicting the crash in the U.S. stock market and other Austrian economists such as Benjamin Anderson. Well after the fact, Fisher realized that his price indexes was at the heart of his problem.

20:16He found that they had theoretical imperfections. But even in 1932, he could clearly see that recovery in the economy was right around the corner, which of course reminds us of Chairman Bernanke, who has been telling us that we are in the early stages of recovery for about Fisher felt that the recovery was inevitable because of reflationary measures, so he felt that they could reinflate the economy and get things going in that manner. The next great economic crisis was the great stagflation of the 1970s. Of course, the 1960s were the go-go years. The economic boom, new technologies, a stock market bubble dominated by the nifty 50. Credit for these boom times at the time was typically attributed to the new scientific management of the economy by the new economists of the day, which were of course the Keynesians.

21:18They brought a new scientific approach of making adjustments, turning the dials to monetary and Fiscal Policy, so as to prevent any kind of recession from appearing and to eliminate the business cycle. Of course, we were simultaneously fighting the Cold War, the Vietnam War, the war on poverty, and we were maintaining this marvelous prosperity during the 1960s. And the Keynesians took all the credit. There were, of course, even new technology like computers and even space travel so it's not very surprising if you don't have any grounding in Austrian economics that you would describe this time as a new era and of course you can see a pattern developing here if you see discussions about scientific management of the economy that's really Keynesian economics and if you hear things like new era in the world or things like the business This cycle is dead. What they're really speaking of here is a period where you're getting monetary inflation without the subsequent and immediate price inflation. And then, of course, there's

22:32the aspect of having amazing technology in the economy, which really translates into overly speculative behavior and malinvestments. And these are all signs of a boom and an impending Bust in the Economy. Academic economist Arthur Oaken, who was a prominent member of President Johnson's Council of Economic Advisers in late 1969, this is, right before the crash, he described the expansion of the economy during the 1960s as unparalleled, unprecedented and uninterrupted. Oaken believed that the economy was on a new dramatic departure from from the Past. Quote, the persistence of prosperity has been an outstanding fact of American economic history of the 1960s. The absence of recession for nearly nine years marks a discreet and dramatic departure from the traditional performance of the American economy. Now after Okun declared the business cycle dead, he went on to demonstrate that research on business cycles was now obsolete and a Thing of the Past." That's why they were getting rid of that course in my undergraduate days. And that the new approach to the economy had replaced it. He confidently declared that

23:53the business cycle was dead and that that was proof par excellence that economic controversies can be solved. And how was the business cycle killed? Eugen found that the slayer was the efficient scientific management of the economy. Quote, more vigorous and more consistent and the application of the tools of economic policy contributed to the obsolescence of the business cycle pattern and the refutation of the stagnation myths. The reform strategy of economic policy did not rest on any new theory. So he's basically taking credit for what's going on in the economy in a big way. According to Oaken, the much older fiscal religion of limiting the size of government and Balancing the Budget was largely based on myth and superstition.

24:48Overthrowing these superstitions of the past and embracing scientific management of the economy had allowed economists to fully subdue the business cycle. It was unfortunate for Oaken that the publication of his book about the slaying of the business cycle took place just one month prior to the onset of the recession and it's the whole stagflation experience of the 1970s. Unemployment would soon exceed 9 percent, the highest level of unemployment in the United States since the Great Depression and it would remain above normal levels for more than two Decades, including 10 double-digit months in the early 1980s, which again is when I was graduating from college, and don't think I wouldn't remember that.

25:43The decade or so that followed would also be characterized by high rates of price inflation, gasoline shortages, punctuated by several painful recessions, and speaking of pain, the Dow The Dow Jones Industrial Average lost 80% of its real inflation-adjusted value over the next decade. Now let's contrast this new scientific management of the economy with what the Austrians were doing. And this is really kind of a low point for Austrian economists. There weren't very many Austrian economists left, and the sort of subsequent generation hadn't really yet made the scene. In 1969, Ludwig von Mises discussed current monetary problems in the last interview that he gave in his life.

26:37He did not make an open prediction of economic or imminent crisis and he was not directly He asked about the business cycle, but he made clear that inflation was the most important economic problem that America faced at that time, and that the new economics of inflationism was producing a false economy. Mises said that, quote, what is needed in order to avoid all of these unwelcome effects of inflation is to restore honesty in the conduct of monetary and, of course, what he's doing is he's implying that current monetary affairs are being conducted in a dishonest fashion. Henry Hazlitt, another great Austrian economist, was writing relentlessly in the late 1960s of the looming economic crisis.

27:29In particular, he wrote about inflation caused by government, about the problems of budget Deficits, about the looming dollar crisis, the false prosperity of the new economics, the returning to the real gold standard, a pending worldwide currency disorder, the failure of the new economics, runaway spending by government and the quote coming monetary collapse and of course Hazlitt was dead on. It wasn't 24 months later that the United States was Likewise, Murray Rothbard penned an important monograph on Austrian theory of the business cycle in 1969, and he wrote in conclusion, quote, The time is ripe for a rediscovery, a renaissance of the Mises theory of the business cycle. It can come none too soon. If it ever Whatever it does, we would have a massive retreat of government from the economic sphere.

28:37But for all this to happen, the world of economics and the public at large must be made aware of the existence of an explanation of the business cycle that has lain neglected on the shelf for all too many tragic years. Let me fast forward to the tech stock bubble. I published an article chronicling the prediction of economists during the technology bubble of the late 1990s, and I think this is something that economists don't like, people going back and reading what they said about events, but it's really a whole lot of fun. At the recent Jekyll Island conference I went back and read all the speeches of the members of the Federal Reserve Board in early 2007 and getting, you know, what they were saying about the Economy, and boy everything was really great right before that market crash happened.

29:33I never knew things were so good. So with this period what I did was I first surveyed leading government monetary leaders and economists and what they were saying about bubbles, and I found that most of them were babbling about bubbles. They could not be identified that the best anti-bubble policy was no policy at all, that bubbles were both rational and irrational. One fellow said that even stocks were actually undervalued in 1929, that globalization could both increase and decrease the severity of bubbles and that bubbles should be targeted and that sometimes they should not be targeted. There was agreement that if asset bubbles do exist then they are inevitable, whether they are rational or not. Obviously these conflicting, contradictory and inane findings leave much to be desired with respect to our understanding of bubbles from the leading leaders of monetary institutions in the United States, especially given that all of these papers that I surveyed were published in 2003 after the bubble had both blown up and collapsed.

30:50I also surveyed business economists using the Wall Street Journal's Semiannual Survey of Economists for the years just prior and just after the tech stock bubble and crash. It seemed that the higher the market got, the more enthusiastic these economists became, The more bullish their pronunciations. In fact, right before the crash, they were practically euphoric, with one of the members stating that just days before the beginning of the crash, quote, there is no end in sight of this expansion. The next survey, which occurs six months later after the NASDAQ had gone down 30%, found the same economist confident that the Fed would engineer a soft landing. Of course, it was one of the hardest landings of any stock market crash in memory. Looking at the forecast of the Congressional Budget Office, the White House, and the blue-chip economic forecasters, we see a clear pattern, and of course, there's no Austrians in this group, that when things were fairly normal in the early 1990s in terms of economic growth, all of these forecasters did a good job of

32:05When the economy went into bubble mode and economic growth rates increased, all of these groups of economists systematically under predicted GDP growth in the economy. And then, of course, after the bubble was over and the crash started, they all overestimated where GDP growth was because GDP was falling and their forecast continues on. In other words, all of these forecasters from Washington DC and Wall Street were very good at drawing a straight line.

32:53Of course, you know, the 1990s was another one of these new eras with new technology that fundamentally changed the economy and led to prosperity that some people considered unimaginable. In fact, one of the biggest problems you might remember from the day was that they were worried about the end of employment. In other words, there would be no jobs, everything would be done by machines and we wouldn't have anything to do. That was one of Newt Gingrich's pet projects. But in that era, as we approached 1999, two economists published a book in late 1999 called Dow 36,000. I think the Dow was around 12,000 at the time. And they wrote in this book, in the introduction, they said, quote, this book will convince you of the single most important fact about stocks at the dawn of the 21st century. They are cheap. This book was followed quickly in procession by David Elias' book, Dow 40,000, and by Ralph and Campura's book, Dow 100,000.

33:57Now in contrast to this, these are all the Keynesian mainstream Wall Street type economists. In contrast to this, Austrian economists were regularly issuing warnings about the bubble economy. Chris Meyer wrote an article on Mises.org in early 2000 about the bubble. Tony Deedin was writing in 1999 about the subject, along with Guido Holtzman and George Reisman, both publishing in August of 1999. Sean Corrigan, Frank Shostak, writing articles about the The Bubble in 1999, Hans Senholtz and Bill Anderson in the early 2000s, Lew Rockwell, Greg Caza, Gary North and myself all writing articles warning about the dangers of the technology bubble and the tech stock bubble.

34:56And there's a lot of similarities in all of these articles, there's a lot of dissimilarities as well, but the general take is that Austrians were warning about the consequences of the Easy Money Policy at the Fed, that there was a huge bubble in technology stocks and the Fed should stop its easy monetary policy. This was inevitably going to break down in the stock market and that this would signal the beginning of painful readjustment processes in the economy. And that's basically what did happen. Okay, basically the paper finds that Austrians had it right and the non-Austrian economists got it wrong. There are exceptions, of course. This is a big world. Robert Schiller, who's not an Austrian economist, also predicted the tech stock bubble. And some Austrians made predictions that were far too early. Jim Grant, for example, was considering the stock market a bubble in 1996. And then we fast forward to the housing bubble in the and the Current Economic Prices.

36:05In mid-2006, I published a paper that chronicled the predictions of what economists were saying about the housing bubble. And remember, this was a time when people were still saying, you can't lose money in real estate or housing prices never go down. In Auburn, in fact, there was a mania to build luxury game day condominiums so that people People who would have a place to stay within walking distance of the football stadium were the six or seven home games for the Auburn football team and I would have asked a bunch of people who were involved in all this, you know, how do you rationalize this? And it was almost everybody had the same answer, they said, well sure it's a high price to pay but you can always sell it for more later on.

36:53You know I didn't really want to publish that paper because I could have looked really bad and made all of the Austrians look pretty bad. When I heard that, I felt, time to send this one off for publication. Now, at the same time, economists from the Fed were regularly denying the existence of the housing bubble. So they're on record for denying it from as early as 2004 all the way through 2007. They said, there's no basis for concern here. Alan Greenspan, their boss, Denied the existence of the bubble early on and did continuously, and then when he stepped down and went into retirement, about a month later he goes onto this lucrative speaking tour around the world and he says, the housing bubble is over, you know, and it's like, wait a second, you've been denying it for all these years, you retire, you step down, you say it's over. His replacement, Ben Bernanke, was also assuring us that there was no problems, So, our examiners tell us that lending standards are generally sound and in particular real

37:58estate appraisal practices have improved in 2006, early 2006. This is the time, really the heyday of things like teaser loans, interest only mortgages and even no documentation loans where you just go to the bank and tell them you're worth a million bucks. It's the same time that Bernanke is telling us that the Fed is on the job and we have nothing to worry about. By the way, it's worth noting, I first alerted readers of this housing bubble on lewrockwell.com in February of 2004 and mises.org readers in June of 2004, two different articles, however I was beaten to the punch by Frank Shostak and Christopher Meyer who published their analysis in 2003. And, of course, it's the similar pattern. The Austrian perspective starts at the Fed, moves to the banks and the mortgage companies, the money supply and the housing markets. In particular, you can see residential investment never even contracted during the recession of 2001. That's never happened in the history of our statistics going back, where the housing market didn't contract during a recession.

39:15So the Austrians had it about right, about two dozen Austrians in the private sector or in academia were on record as predicting the housing bubble in the inevitable bust. Few outside the Austrian school made such predictions and those predictions came too late. According to the mainstream, the bubble conditions was the new normal. was the New Era. One of the funnier cases of this whole thing is Tyler Cowen. He said on his blog, The Marginal Revolution, quote, if I believed in the Austrian business cycle theory, and then he listed several points, one, I would think that Asian central banks by buying U.S. dollars have been driving a massive distortion of real exchange rates and Interest Rates. 2. I would think that the U.S. economy is over-invested in non-export durables, most especially residential housing. 3. I would think that we have piled on far too much debt in both private and public sectors. 4. I would think that these trends cannot possibly continue. Furthermore, the U.S. would be like an addict who needed an ever-increasing

40:26Dose of Monetary Fix. This of course would eventually prove impossible. Five, I would think the U.S. economy is due for a dollar plunge and furthermore I would think it would not handle such an unexpected shock very well. Seven, I would think that Hayek's monetary nationalism and international stability now priced at $70 a copy is a secret track for for Our Times, and by the way, we ended up republishing that, maybe partly on the basis of Tyler's recommendation. And he ends his blog post, but he says, but of course, that's not me. Yes, according to mainstream economists, that was a new era, and it was the result default of scientific management of the economy and new technology in the economy, and in particular Federal Reserve top officials said that new forms of mortgages combined with asset-backed securities, collateralized debt obligations, derivatives and credit default swaps made these credit markets transparent and liquid for the first time in history.

41:47I guess I just didn't understand the meaning of transparent and liquid. Of course it all had to come to an end and in August 2007 the Philadelphia Home Builder Stock Index fell by 5% and using some technical analysis I was able to suggest on Mises.org that that was the top of the bubble and it turned out to be the peak in the housing stocks and a signal of worse times to come. In the spring of 2005, I published an article in the quarterly journal of Austrian Economics, a paper called Skyscrapers and Business Cycles. In the paper I show a correlation between the building of record-setting skyscrapers and economic crises for more than a century.

42:36And basically what I do in the paper is show an Austrian economic theory rationale to connect Connect the building of record-setting skyscrapers with major economic crises. In late July of 2007, this skyscraper model sent a signal of global economic crises, and I did actually post that on the blog on Mises.org in, I think, August of 2007. At that time, the Dubai Tower then reached a height that exceeded the previous record in Taipei 101. Now not much was made of this signal at the time. I certainly changed my investments, but there wasn't much to do about it.

43:27The economy at this time, we were still being assured by Secretary of the Treasury Paulson, Bernanke and President Bush, that everything was fine, in fact it was better than ever. Meanwhile there were only five comments posted on my blog post, one of which was from me. I wasn't interviewed by any media about this and in fact the only interviews I was given were outside the United States, South American, Europe, Asia. That was until the crisis actually did reveal itself as a global systemic economic crisis. And then finally when the wealthy leaders of Dubai, where the new record skyscraper was built, when it turned out they couldn't pay their bills, the skyscraper model finally got some attention and was written up in Barron's, Bloomberg, CNN, and many other media outlets.

44:31The conclusion of all this analysis, I think, that goes back almost a hundred years is that Austrians pass the mainstream's own test. The most important thing to know, I think, in an economy is when an economic crisis will will start, or if one is appending to start, and the Austrians have passed that test, or the mainstream has not. At this point, I think it's clear that the Austrian Theory of the Business Cycle has well-served Austrian economists in predicting the major economic crisis over the last century. It is also clear that non-Austrian economists, particularly mainstream economists in academia, government, and even on Wall Street, have an incredibly poor record of Predicting Crisis Events. They seem to become more euphoric and more bullish right before the economy goes into a plunge. There are, of course, exceptions, but the rule is that the Austrians have been right. The mainstream has been dead wrong. Austrians pass the mainstream's own test. The mainstream economists fail their own test. Now, despite this record of failure

45:48and Embarrassment, the mainstream economists have expressed little interest in the Austrian theory of the business cycle. First, they completely ignored us. Then, they basically ridiculed us. And now, they are starting to attack us. Those that have broached the subject include Paul Krugman, Brad DeLong, Tyler Cowan, and Gordon Tullock. But their critiques are are based on basic misrepresentation of the Austrian theory of the business cycle. Whether this misrepresentation is intentional or whether it is their innate ability for mainstream economists to understand economics at the macroeconomic level, it is clear they need to be replaced and placed in jobs where they can do far less damage.

46:41Thank you very much. I was hoping to use up most of my time, but I'll try to answer a few questions.

47:15Well, the problem of being a permanent bearer or being permanently bearish in the economy is one actually that Murray Rothbard warned me against, you know, and he was actually He was actually very good. He was not very good in terms of prediction, especially in investing. He said, you know, don't ever follow me in terms of investing. He says, if you want to get a small fortune, start with a large fortune and just follow what I do. But he was very good at recognizing that after the crash, you know, you would, the resources would have to be reallocated.

48:07and the, you know, once that process took place and the economy could start either back on a normal growth pattern or on maybe another boom pattern and so he was actually pretty good at that sort of thing and was very leery about pronostication in general but it is a problem and I don't think that Austrians are necessarily all that good at predicting things normal times and that sort of thing. It's not really their interest. Most Austrian economists are You know, we're not in it for the money, so we're not really clued in to the stock market on a regular basis, and we don't do that thing. Now, there's a lot of private sector Austrians who do those sort of things and have been quite successful at that, and certainly they go through periods of bullishness and bearishness on a regular basis. Yes, sir.

49:03I have a question regarding, have there been any published works that detail the symbiotic relationship of modern, ancient economists and the intellectual cast that support the state apparatus? Obviously, the creative environment is working in the office, and we're all keen to know, I'll come in here and get you a couple of words to detail on why that is. Now, you just hit on it a little bit, and you said, you know, we're not in it for the money. Has anybody taken the effort to put together a systematic record of the, I guess the corruption of the modern economic practice because of its relationship in supporting the iron stock.

50:23Watch, and Econ Journal Watch, they publish an article just about every issue, exploring the deeper, darker areas of the economics profession, bias in the journal process, various other issues related to your question, but it certainly is one of growing interest. economy, gold days, or Monday, or I don't know. I want to go back to this previous question because on lewrockwell.com and mises.org, They publish articles almost on a weekly basis showing the bad economics and the bad policy recommendations, particularly people like Paul Krugman, but if you look at Bill Anderson's articles and Bob Murphy's articles and a host of other articles, you're going to see this sort of systematic deception that's taking place.

51:35We published one showing how Paul Krugman in 2001 and 2002 was calling for on a regular basis for the Fed to start a housing bubble to get us out of the recession. That was a very sore spot for Mr. Krugman because some of my readers cut and pasted from my articles and put it on his blog. And I got another one that this guy did on Mises.org where he contrasted all these quotes from Krugman attacking Bush's deficits, you know, and how they were so bad they were going to kill the economy, so on and so forth, and he contrasted that with his more recent statements about the Obama budget deficits, which were of course much larger, and Krugman said not only were they a good thing, but they were too small, that the budget deficit actually needed to be bigger in order to save the economy. So we're undermining them on a regular, almost daily basis, I think. Now, you wanted to look in terms of the contrast, you know, is there

52:46any other place that is largely unharmed by the crisis? No. No, there's not another economy on the gold standard. I think maybe it would be worthwhile looking at some of the Eastern European countries, not Greece obviously, but the newer more free Country market ones, Estonia possibly, and seeing how things have turned out there relative to here, you know, obviously countries have done better than other countries.

53:33There's some with currency boards and things of that nature, but ultimately currency boards, you know, they get undermined as well and the problems that result from them can be even more devastating, believe it or not, than a central bank. But no, there's no perfection out there that we can compare ourselves to. There's no country that's on a gold standard. Right now, only people can be on their own gold standard. Yes, sir. Yes sir.

54:30and Knowledge. Yes, Alan Greenspan on the Gold Standard in his early years in more recent times he refers to that as just a philosophical thing and when it comes down to practical things you know you have to be practical and so he's just being practical over the last, you know, his 17-year stint at the head of the Fed and, of course, he was widely known for the way he spoke to the public and to Congress, sort of misleading people or saying things in such a way that nobody could understand it. I labeled in an article on lewrockwell.com, I labeled that green spam because that's exactly what it is it's just nonsense you shouldn't read it you should just delete it never believe actually a word because it can only get you in trouble so what Alan Greenspan says is exactly like a spam email message there's no truth and it can only be trouble and it probably will be And in fact, that's what Greenspan is all about.

55:49One more. Well, according to Chairman Bernanke, we're on the verge of returning to normal. Well, economy, given the policies that have ensued in the wake of the housing bubble, the massive deficit spending, the massive bailouts, the massive increase in the monetary base, we can't really have any anticipation of a return to a normal economy for quite The malinvestments that have taken place are yet to be cleared up and all of the new problems that have been added to in terms of the national debt, the monetary base, and the moral hazard that has been injected into people's thinking, which is clearly going on in today's marketplace that we'll invest in these companies knowing that we're going to get bailed out.

57:16We can't anticipate a return to a normal economy until all of that has been dealt with. And there's no signs that they're even beginning to deal with any of those problems, even along their own terms. They haven't made any progress, for example, in terms of financial market re-regulation, which wouldn't probably be a good thing anyways, but they haven't even started that process really as far as I can tell. So we have a long way to come. Thank you very much.