fredag 21. desember 2012

Austrians predicted the Housing Bubble - "Lord Keynes" lies again

The blogger Lord Keynes has attempted to show that Austrians did not predict the housing bubble, that it doesnt matter and that Post-Keynesians predicted it (better or something). In it he employs lies, fallacies and hides information from his readers.

1. Dean Baker recognized the Housing bubble (Fallacy)

That is correct, and even earlier Fred Harrison recognized the housing bubble in 1997. And he is Georgist (meaning a free-marketeer who makes an exception for land). This is fallacy because it is not a proper argument that shows why specific Austrians did not predict the bubble.

This is a fallacy that runs through the whole article, "Austrians didnt predict the housing bubble because other predicted it later or at the same time". And he also refers to these people as ordinary "Keynesians", which is a mislabeling. Minskyites are essentially Austro-Keynesian, whether their political ideology likes it or not.

Anyway, I will critique Dean Bakers analysis later.

2. Socialists recognized a Housing Bubble (Fallacy)

"Now does anyone seriously think that these correct identifications of an asset bubble in housing vindicates the Marxist theory?"

True, but the aforementioned articles linked to by Socialdemocracy21st do not show and nor do the socialist/marxist have a theory that explains how credit causes cycles, so they basically cannot account for this fact.

3. "Identifying a housing bubble after 2003 is not a prediction" (Fallacy):

"It is obvious that Austrians identifying a housing bubble from 2003–2004 onwards should not regarded as having any special predictive power. They were merely identifying an on-going phenomenon. It is, furthermore, notable that when some Austrians identified a housing bubble in the first half of 2002, so too did the Keynesian economist Dean Baker.

We must remember that any “predictions” after 2002 are not even predictions at all: they represent people identifying an existing asset bubble that was becoming worse."

By the same token then, any "predictions" by Keen, Hudson etc. are not "predictions". Furthermore, all predictions after 1997 are also just "identifying an on-going phenomenon" since Harrison had already predicted it.
Anyway this is wrong, what is being predicted is that the housing prices are unsustainable and that an oversupply of houses are building which will lead to a quick drop in housing prices, and trigger an economic recession.

The fact is that it is usually identifying an on-going phenomenon such as a bubble, that is hard to do. Which asset class is bloated ? No, formula or scientific theory exists to accurately predict this.

4. Critique of Ron Pauls predictions (Misinformation)

the housing market has been grossly distorted. We can soon expect a major downward correction in the housing industry, prompted by rising interest rates.”
Yet it is obvious that Paul is here thinking of a correction of existing 2000 housing prices, not a massive 2000s bubble in real estate and a financial crisis in 2008. The word “soon” strongly suggests Paul was expecting the correction in the next year or two after 2000, as from 1999–2000 the Fed had raised the Federal Funds rate and was widely expected to raise it further in 2000, owing to the boom. This speech shows no prediction of the 2000s housing bubble."

Well, the FED responded by aggressively lowering interest rates, that can postphone recessions and price bubbles from crashing. Instead of the housing market crashing, the stock market bubble collapsed, and basically Ron Paul got the timing wrong. Only the stock market bubble burst.

But here Lord Keynes is deceiving his audience, he ignores the fact that Ron Paul made several predictions on the housing bubble:

"The special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing.
Despite the long-term damage to the economy inflicted by the government's interference in the housing market, the government's policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged overinvestment in housing." - Paul, Ron, 2002. Testimony to U.S. House of Representatives

"The Federal Reserve must stop inflating the currency merely for the purpose of artificially lowering interest rates to perpetuate a financial bubble. This policy allows government and consumer debt to grow beyond sustainable levels, while undermining incentives to save. This in turn undermines capital investment while exaggerating consumption." - The Coming Category 5 Financial Hurricane, Dr. Ron Paul, September 15 2005

"The Fed tries to keep the consumer spending spree going, not through hard work and savings, but by creating artificial wealth in stock markets bubbles and housing bubbles. When these distortions run their course and are discovered, the corrections will be quite painful." - What the Price of Gold is Telling Us, Dr. Ron Paul, April 25 2006

There are almost endless quotes like this, so I will stop here.

Furthermore, Ron Paul focuses on Fannie Mae & Freddie Mac, which in themselves were the biggest bubbles of them all.

5. William Andersons predictions

He shows that Anderson talked about a mini-boom and a stock market bubble. We did have a stock market bubble and a big boom. I agree that Anderson did not pinpoint housing, even though I feel that is a hatchet requirement that "Lord Keynes" addded in.

I take issue with this statement though:
"Unfortunately, it was the deregulated financial sector that was the main cause of the 1990s and 2000s bubbles."

Unfortunately, the existence of the FED, FDIC, and a plethora of federal and state agencies that delineate rules for banks, brokers, stock exchanges etc. preclude anyone from claiming that it is "deregulated".

One can talk about changes in regulation, but not such a sector being deregulated or unregulated.

6. Recognizes correct Austrian predictions but makes bad arguments

He reviews another Ron Paul prediction (4), Gary North prediction (6) whilst not having read it, Hans Sennholz (9). He makes two arguments against these correct predictions, again that Dean Baker has also predicted it and that several of them argue there is a bubble in US treasuries.

Now US treasury rates have not risen, and Post-Keynesians(atleast MMTs and Minskyites) have pretty much staked their theory on them not rising and they did rise immensely in the crisis but have since fallen. A caveat here is that the FED has been supporting that market immensly, so when rates rise we shall see who is really right.

7. His flawed conclusion from this (Misinformation)

"When we review the various alleged Austrian “predictions” of the 2000s housing bubble most of them collapse. Of the eleven claims made, six (54%) do not even identify the housing boom, and certainly do not predict any such thing. Two (18%) identify the bubble, but after Dean Baker did (in August, 2002)."

He has not really shown this, he is simply selectively chosing an arbitrary year to cut off reading predictions.

8. What about after 2003 ? (Lie)

"The Austrians showed no great predictive power in 2003 or afterwards in identifying the bubble and the economic effects of a crash."

This is wrong, here is a list of Austrians articles predicting the housing bubble that Bezemer (himself a follower of Keen) has not even tried to review:

"Paul Kasriel( /

Frank Shostak (Housing Bubble: Myth or Reality?) - 2003

James Grant (Un-Real Estate)
Christopher Mayer (The Housing Bubble) - 2004
Robert Wenzel (SUPER ALERT: Dramatic Slowdown In Money Supply Growth /
Government Isn't God: FDIC Sticks Banks With Bad Loans and Sticks
Borrowers With Subprime Junk / A Letter to a Friend on the Logic of Real
Estate Investing ) - 2004/2008
Eric Englund (When Will America's Housing Bubble Burst? / Monetizing Envy
and America's Housing Bubble / Houses Are Consumer Durables, Not
Stefan Karlsson (America's Unsustainable Boom)
Thorstein Polleit (Sowing the Seeds of the Next Crisis)
Hans Sennholz (The Fed is Culpable)
Mark Thornthon (Housing: Too Good to Be True)
Robert Blumen (Fannie Mae Distorts Markets)


So by simply ignoring predictions Bezemer and here "Socialdemocracy21st" reaches the conclusion he wishes. But the picture he paints is even more disingenious, Keen has nowhere predicted the US housing bubble, even though he claims this himself numerous times. I show that here.

9. The claim that "Austrian Business Cycle Theory" does not explain the financial crisis (Lie)

He makes this claim thinly, first be repeating the "natural rate of interest" does not exist and that it does not deal with reckless lending by banks to buy consumer goods and mortgages.

"The Austrian Business Cycle Theory (ABCT) holds that central bank fiat money or fractional reserve banking-induced increases in credit (unbacked by commodity money) drives down the monetary rate of interest, causing it to go below the Wicksellian natural rate of interest. This causes malinvestment in capital goods sectors. However, the unique Wicksellian natural rate of interest does not exist, and is a pure fantasy (see here and here). The ABCT does not explain or deal with reckless lending by banks to people for mortgages or consumer goods, and nothing about financial or real asset bubbles, and nothing about financial crises. "

This is completely wrong, and all major books on the Austrian Business Cycle Theory deals with just these things.

1. The natural rate of interest is the term used by austrians for the interest rate, if all credit creation were backed by prior savings. Such a rate of interest does exist, if and when all loans are backed by prior saving.

I fully admit that the term carries some unfortunate neoclassical baggage, but this has been dropped in all modern expositions(basically all the ones between 1970-2012).

2. He repeats the claim he has made earlier that since Rothbard does not include inflationary credit buying consumer goods, the ABCT does not hold. But the problem is that many Austrians authors, all the way back to Hayek Prices and Production emphasizes durable consumer goods. I have debunked this claim earlier.

In fact in one of the prediction articles mentioned Eric Englund (an Austrian) emphasizes precisely the point that houses bought for consumption are durable consumer goods and not investments. Which makes them particularly bad investments.


Lord Keynes lies and misinforms his readers about the facts, and disingeniously ignores articles that are precise in their description of the problem.

His numbers were by using Dick Bezemers flawed study:

"So in other words eight (72%) of the eleven made accurate predictions about the bubble and crisis and were non-Austrians. The largest group (45%) were actually Heterodox Keynesians."

If one simply adds the Austrians I know of and have checked (and there are more I have not bothered to include), the numbers become slightly different:

1. Post-Keynesian/Minskyites (22 %): Baker, Godley, Keen and Sorenson.

2. Maverick neoclassical (9 %): Roubini and Shiller.

3. Austrians (68 %): Richebächer, Schiff, Paul Kasriel, Frank Shostak, James Grant, Christopher Mayer, Robert Wenzel, Eric Englund, Stefan Karlsson, Thorstein Polleit, Hans Sennholz, Mark Thornthon, Ron Paul and Robert Blumen.

4. Georgist (4,5 %): Fred Harrison, should get more brownie points for being early.

5. Austrian & Post-Keynesian(4,5 %): Janszen

Total: 22

I will count Janszen as part of both camps and thereby improving the numbers for the Post-Keynesians/Minskyites.

And I have not even removed Keen, who hasnt predicted the US housing bubble and the "Great Financial Crisis", and as I said I didnt even add all the Austrians ( such as Faber, Jim Rogers, William White, Gary Shilling etc.)

Given how Dick Bezemers study is flawed when it comes to Keen, I have not even checked and revised the numbers for these other Post-Keynesians either. It is also curious that he has ignored all academic Austrians, and only included finance analysts with a background in Austrian economics.

This picture is even more dismal when one counts the fact that all universities teach Kindleberger/Minsky view of the crisis when they teach about financial crises, and that they teach traditional Neo-Keynesian economics when they teach macro. Almost no universities(three I believe and scattered individuals) taught Austrians prior to 2009, and they made up about less than 1 % of the academic profession according to Mark Thornthon.

I am not of the opinion that one should use lies and deceit, in order to unseat wrongheaded ideas but "Socialdemocracy21st" is more than willing to do so.

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