The Impact of Easy Money Policies on the Economy and Austrian Business Cycle Theory
In recent years, the exploration of post-2007-2008 financial crisis history has produced significant literature that challenges conventional monetary policy narratives. Among these, two books stand out for their insightful analysis and critique of central banks’ roles in shaping the current economic environment: The Lords of Easy Money: How the Federal Reserve Broke the American Economy by Christopher Leonard and The Price of Time: The Real Story of Interest by Edward Chancellor.
The Lords of Easy Money provides a compelling narrative that aligns closely with the Austrian Business Cycle Theory (ABCT), albeit without explicit mention. Leonard, a journalist, offers a perspective accessible to a broad audience, shedding light on the consequences of easy monetary policies, such as quantitative easing, on the financial sector and the wider economy. These policies, intended to stimulate economic growth by providing the financial sector with liquidity, have instead primarily benefited the financial sector at the expense of the real economy.
Edward Chancellor’s The Price of Time delves into the history of interest rates, framed through an Austrian economics lens. The book stands out for its critical examination of the mainstream economic narratives, despite often quoting mainstream economists. Chancellor points out the apparent oversight in mainstream economics to acknowledge the predictive accuracy of ABCT, particularly in relation to the economic events of the 1920s and their aftermath. This omission is significant, given the differing consequences between expected and actual outcomes of monetary policies.
The narrative in The Price of Time could have been enhanced by juxtaposing mainstream economic narratives with ABCT-based interpretations, especially considering the discrepancies in the outcomes of monetary policies enacted post-2008. For example, the expected economic growth from flood of new money into the financial sector did not materialize as anticipated. Instead, the money benefited top-tier financial institutions and investors, exacerbating income disparities. This aspect, often neglected by political leaders and mainstream economists, underscores the urgent need for a deeper exploration and critique based on ABCT principles.
The preferential treatment afforded to the financial sector through easy money policies, and the resultant income transfers, have been largely overlooked. Noteworthy is how such policies have led to lucrative positions and speaking fees for former Federal Reserve chairs, highlighting potential conflicts of interest. This aspect invites intense scrutiny and debate, which unfortunately, has been lacking in both media and academic circles.
While The Lords of Easy Money adeptly brings these issues to a general readership, The Price of Time could have leveraged ABCT more rigorously to dissect and critique the employed narratives and policies. Despite touching upon the relevance of Hayek’s work to the contemporary economic setting, Chancellor’s narrative stops short of fully applying ABCT to analyze the effects of central bank interventions and the resulting economic dynamics.
It’s worth noting that financial prediction involves a blend of quantitative, qualitative, and behavioral factors, which makes precise forecasting challenging. Despite this difficulty, the significance of managing the risk of severe loss, instead of pinpointing the exact timing of market collapses, cannot be overstated. Furthermore, the widespread reliance on the Consumer Price Index (CPI) by mainstream economists glosses over the nuanced impacts of easy money policies, illustrating the divergence between theoretical models and real-world economic burdens.
Both books, in addition to The Road to Serfdom by Friedrich Hayek, offer valuable insights into the implications of central bank policies and the broader economic theories at play. Each book, through its unique lens, contributes to a more nuanced understanding of the economic landscape shaped by the 2007-2008 financial crisis.
To those interested in the complexities of monetary policy and its real-world consequences, The Lords of Easy Money and The Price of Time serve as essential readings. They not only offer critiques of current policies and practices but also underscore the relevance of Austrian Business Cycle Theory in understanding today’s economic challenges.
