13 Jan 2010

Megan McArdle Coming Around to the Austrian View?

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Bill R. writes to me:

I thought you’d appreciate this example of McArdle “growing” into her new perspective (h/t Instapundit):

[Megan McArdle:] The best explanation for the calamity that has overtaken us may simply be that cheap money makes us all stupid. The massive inflows of international capital, which Ben Bernanke has called the “global savings glut,” poured into our loan markets, driving interest rates lower—and, since most real estate is purchased with borrowed funds, pushing up the price of property in both the commercial and residential sectors. Rising prices, in turn, disguised any potential problems with the borrowers, because if they ran into cash-flow problems, they could always refinance, or sell. Everyone was getting bad signals from the market, and outlandish purchases looked almost rational.

That answer isn’t quite satisfying, especially in the face of another financial meltdown. We don’t want ambiguity and complex systems; we want heroes, villains, and a happy ending. But by now we should all know that real-estate markets are rarely the stuff of fairy tales.

[Bill R:] Compare this to her post blasting Austrians and their “Evil Man theory of Failure” post and the lambasting of the impact of “a smallish injection of short term capital”:

[Megan McArdle:] Here’s the problem: if markets are so great, how come the entire system can be brought low by a smallish injection of short-term capital?

Austrians: If the market does not price the injection of short term capital into its actions, why would we trust it to price anything else correctly? If the markets treat short-term capital as substantially equivalent to long-term capital, we have much bigger problems than Alan Greenspan.

[Bill R:] You’ve already critiqued her initial post here and here….Most of the key points have already been discussed. McArdle only adds to the polemical case against one part of the left’s narrative by invoking “sophisticated” commercial lenders so I guess that’s a plus.

I just thought it would be a good time to gloat a little…

What Bill doesn’t realize is that I am above gloating.

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