In three weeks I will take a team of students from The King's College in New York City to the University of Sofia in Bulgaria. Together with Bulgarian students and professors, we will explore government and central bank interventions in the natural functioning of several key markets, interventions that have distorted important signals such as interest rates and housing prices, paving the way for the current global economic troubles. As I was preparing my PowerPoint presentation, I read the following in a commentary on the famous rap song "Fear the Boom and Bust": "Trying to cure a recession with more cheap credit is like trying to cure chemotherapy with more cancer."
Even the nuttiest Keynesians today acknowledge the fact that the bust of 2008 was caused by malinvestments in an environment of perverse incentives. Unfortunately they refuse to explore the source of those distortions, blaming the last economic bubble on some random mutation in the spirit of capitalism, an irrational boom of greed brought about by a fictional abolition of regulation during an allegedly laissez faire administration. They want to solve the problem of low consumer confidence and high unemployment rates through bailing out inefficient industries and subsidizing "green" jobs. But that is just as silly as an attempt to cure inflation through price ceilings and rationing, "exploitation" through minimum wages and tighter labor standards, or poverty through boycotting Wal-Mart's "sweatshop" products and buying "fair trade" coffee at the local "mother nature" store.
There is a resurgence of criticisms against the former demigod of monetary policy, Alan Greenspan, for keeping the Fed interest rates below their natural market levels around the turn of the century. This gives indications that economists are finally willing to look outside the mainstream for an alternative explanation of the business cycle. Orthodox Keynesian theory sees recessions as psychological phenomena caused by the irrational mood swings of investors and consumers. Austrian economists such as Ludwig von Mises and Friedrich Hayek have been trying to convince their colleagues that busts are conceived during drunken orgies of credit expansions sponsored by central bankers who are so often moved by their own "animal spirits" and arrogance. It is counterintuitive to fear the boom and to embrace the bust as a cure, but if the Austrians are right, letting Obama and Bernanke "spend our way out of it" makes as much sense as giving Dr. House the key to a Vicodin factory.