Monday, October 27, 2008

Sometimes the economic beauty contest gets us into an ugly mess

As the Mises blog pointed out, there was a very strange article in "The Independent" today by an HSBC bank economist, which discusses Ludwig von Mises. Feeling very proprietorial about anything Austrian reported in English newspapers, I dropped my own comment onto the article, which I've placed below, though the earlier comment by Professor Roger Garrison is much better. I suppose we ought to tip our hats to any Keynesian economist even daring to mention the dreaded word "Mises", but no wonder HSBC have started to come under severe financial stress today if this article indicates the quality of their economists:

Posted by Jack Maturin | 27.10.08, 15:59 GMT

The markets didn't fail, Stephen, the central planning commissar at the heart of the socialist central planning board system, Alan Greenspan, failed. The Bank of England, the European Central Bank, and all the other socialist money planning boards also failed, after taking his lead. But just what has "the market" to do with any of these heavily interconnected socialist institutions?
Posted by R. W. Garrison | 27.10.08, 10:34 GMT

The real Keynesian beauty contest was played out between Greenspan himself and traders in securities markets. The traders had to guess what interest rate the central bank was going to target next; and Greenspan had to guess what guesses the traders were making. We had a long period (roughly 2003-2005) where the guessing was mutually reinforcing--and mutually comforting. The trouble was that this ethereal interest-rate equilibirum was at odds with the interest rate that the market (sans central-bank interest-rate setting) would have sustained. The current financial collapse is a dramatic demonstration that the Federal Reserve's interest rates were in fact unsustainable. This, in essence, in the Mises-Hayek theory. The market can allocate resources over time--better than any other known economic system. The Keynesian beauty contest comes into play only when a Big Player (the central bank) distorts the market mechanisms--and when one of the beauties is Alan Greenspan.

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