No, I am not a Keynesian. I am Hayekian, I've learned all the lessons from the Austrians there are, and I know them far better than you can hope to. But I also know their mistakes.
All booms end in slumps. The cycle is not removable.
Monetary policy, in particular, cannot remove booms and slumps from economic growth histories. The most it can ever hope to do is (1) slightly moderate their amplitude, (2) ease business dislocations and unemployment in the slumps, modestly, and (3) do so without deranging the long term price level too much, while still allowing either fluctuations of a factor of 2 in the short run, or progressive falls on the order of a few percent a year.
Asking more of monetary policy is asking of it what it can never deliver. Monetary policy does not cause the cycle, which is endogenous. Mises' specific policy prescriptions would not remove the cycle. They might well force the slumps to be vastly more severe than in recent times, while having the benefit of a relatively stable long term price level. But all he promises cannot be achieved by his prescriptions, because he misdiagnosed the operating cause.
Furthermore, even his policy prescription would require destruction of essential economic liberties, and not just on the part of authorities or the government. To prevent all issuance of credit without commodity cover would require a draconian government regulatory apparatus at least equal to that he himself rightly decried in exchange controls and the like. New money creation is also endogenous, as long as men are free.
Moreover, it is crazy to expect and to trust the government to run such policies for such ends. No one legal reform is going to outlaw booms or busts, and governments listen to other forces in such matters anyway, as Mises knew well himself.
"What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media."
That is what he thought, but it is demonstrably incorrect. What is actually needed is efficient allocation of capital in line with accurate estimates of future prices. Where that is present, none of the capital misallocation losses the cycle brings will occur, regardless of how investments are financed. And where that is absent, such real losses will occur, regardless of how much real capital inputs have been saved out of income beforehand.
You can save out of income enough real capital to build an empty building in the middle of nowhere that no one will ever use. Your having save the full value will not prevent the loss; the cause of the loss is the misallocation, that its actual present value to other men in the real conditions of the future, is less than you paid for it.
If you didn't save out of income but commanded the resource to build through credit issuance, but the actual present value to other men of in the real conditions of the future, of the use you put the commanded capital to, actually fully justifies the price you paid for it, then you can repay your debt in full and on schedule, from the capital gain the project creates.
Mises mistake is that he thought the first derivative of invested capital is net savings out of income. It isn't. That is one term in the first derivative of invested capital. But that derivative is actually dominated by changes to the value of existing capital caused by reallocations and adaptations to new uses. At bottom, this involved confusing the volume of physical capital and the *value* of that capital, or reflected a *book value* bias in understanding the *value* of capital.
Net new real savings can increase directly the *book value* of invested capital - but whether the value that results is equal to that, or higher, or lower, does not depend on what was paid for it. It depends on the accuracy of the forecast used to decide on that use of the capital.
In this Theory of Money and Credit, Mises makes the further mistake of thinking that both the scale and the composition of capital investments engaged in can be deduced from one single schedule that marches down simultaneously through the return the investment will achieve, and the period the investment will take in time, the latter from fastest to slowest. And this is a flat error. It was motivated by a desire to measure the total capital of the society as a time period, capital value divided by income, effectively, and to see all additions to net capital value as equivalent to lengthening the average capital period.
But there is no relation between the actual period of a particular use of capital, and the return it is expected to achieve. The allocation through uses of capital proceeds according to (risk adjusted) expected return, and not period. Mises thought average periods beyond what had already been saved ("book value" of capital) would be unsustainable, but this is the wage fund theory of capital in drag. That theory is thoroughly wrong; specifically it fails completely to account for changes in the value of the existing capital stock as demand shifts.
Moreover, the operative word is "expected" return, because the actual return will differ, and do so dramatically when the prices under which the decision is made differ from those actually seen. Hayek was the one who saw the critical importance of this factor, in the specific form of plan compatibility. It is entirely possible for the economy to enter specific allocations that must be falsified by any set of future prices. When that happens, backtracking and undoing past allocations will always be necessary and losses will always be taken - quite independent of original financing being monetary or otherwise. In other words, Hayek found the true nature of the cycle, not Mises.
Credit booms do not collapse because they are built on banknotes, they collapse because incorrect price signals reward incorrect capital allocations, and those mean losses. You could build them on real savings and they would still collapse if the prices directing them were wrong. And you can't remove the cause by removing the ability of the operative prices (especially long interest rates) to move; they are needed and needed to be flexible to solve the intertemporal allocation problem.
Mises remains wrong in the matter. The cycle is not removable. Credit issuance is not an economic sin. And it doesn't pick anybody's pocket.
The truth in Mises position is that the cycle does react to disequilibrium interest rates, and secondarily that price stability is an appropriate target for monetary policy. His criticism of naive inflationism remain entirely sound. But his attack on any issuance of fiduciary media beyond commodity cover is unsound as economics, and the hyperbole since built around that attack has become the new form of capitalist-bashing and a danger to essential economic liberties.
You really are a pompous jerk, aren't you?
Do you know the difference between a capital good and capital, a monetary instrument? They are not the same thing at all.
And when folks siphon off unearned profits from banks to buy hookers, condos, private jets and vacation palaces in remote locations, that is misallocation of capital (money). There was no predicted future return because these assets are fundamentally unproductive. There might have been a fanciful expectation of a gain through the inflation of the valuation of these assets, but that is very different.
Once again the shollowness of your thinking, however large the words you toss around, stares out at even the most casual reader.
Excuse me, Mr. Super Genius. I automatically bow and genuflect before your awesome self-proclaimed wisdom. Why, you are so smart, you are in a league with these fellows.
“Derivatives have permitted financial risks to be unbundled in ways that have facilitated both their measurement and their management…. As a result, not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.”~~Alan Greenspan, May 2003
"American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."~~Alan Greenspan, February 22, 2004
“The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions.”~~Alan Greenspan, May 2005
"We're not about to go into a situation where (real estate) prices will go down. There is no evidence home prices are going to collapse."~~Alan Greenspan, May 21, 2006
“The damage from the subprime market has been largely contained. Fortunately, the financial system and the economy are strong enough to weather this storm.”~~Richard Fisher, Federal Reserve Bank of Dallas President, Apr 4, 2007
"All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."~~Fed Chairman Ben Bernanke, May 17, 2007
I don't think we're headed into a recession. But there's no question we're in a slow down and that's why we acted with over $150 billion worth of pro-growth economic incentives, mainly money going into the hands of our consumers... The purpose is to encourage our consumers - to give 'em money - to help deal with the adverse effect of the decline in housing values.~~President George W. Bush, Feb 28, 2008